Discriminatory Trade Promotions in Consumer Search Markets

This paper shows that in consumer search markets, discriminatory trade promotions create more profits for manufacturers than uniform pricing. The mechanism relies on consumers having heterogeneous search cost and applies even if they have identical demand. By giving some, but not all, retailers a trade promotion, manufacturers create more competition between retailers and boost demand. Relative to uniform pricing retailers who receive the trade promotion sell to a disproportionately larger share of low search cost consumers who are more price sensitive, making these retailers compete stronger. Retailers that do not receive the trade promotion lower their margins, serve a smaller customer base, and are keen to prevent more consumers from leaving.