Prisoners Dilemma and Retail Promotions

It is not unusual to get 1 kg onion free for purchases above say Rs. 250/- or half kg sugar free for purchases above say Rs. 300/- in leading retail outlets. Does this attract consumer loyalty. A study sometime back along with my students revealed certain interesting dimensions. The presentation is found here. I will delve into certain dimension here.

Promotions are key element in this process and higher promotional elasticity will be driven by the increased ambiance as an output coupled with reduction in psychic costs. Researchers and strategists can use utility models to study consumer behavior and the reasons for their preference towards particular stores.

In the increased emphasis on promotions, an interesting fact to note that customers continue to be loyal to firms like Nilgiris and Namdharis which are very low on promotions. At least in the initial phases, customer loyalty could not be generated in major food retailers despite excessive emphasis on promotions as the following matrix shows.

High on promotional campaigns are firms like Food Bazaar, Fabmall (now More), Foodworld etc. Interesting none have scored high on loyalty. the two firms scoring high on loyalty are Nilgiris and Namdharis who score extremely low on promotions.  What could be the reasons behind the interesting anomaly. 

Let us start with the market structure. We observe monopolistic competition necessitating product differentiation.  Firms seek to differentiate on basis quality, assortment, convenience of delivery and time, point of information for various products etc.  Nilgiris and Namdharis have existed for long time and have differentiated on certain counts attracting customer base from those segments. Now product differentiation like prices can be sticky. Switch over costs though not prominent in retail can still play a role. Yet for the comparative new firms, the switch over costs could be linked to location than promotional factors.  Low switching costs could make consumers experiment. In absence of promotions, location (ease of availability of products) and assortment  could be the factors in influencing demand. Yet the introduction of promotions add a new dimension. But it comes with its own set of idiosyncrasies. Diminishing returns knows no bounds and plays a role. As the promotions increase, keeping other inputs constant, if customer loyalty is an output, it will start to diminish beyond a certain degree of promotions.  Fu

	Firm A Promotions Low                               →                   High
Firm B                                                     Low                             Promotions                                                              ↓                                                               High	Collectively better off – attract customers	‘A ‘ likely to be better off over ‘B’- trying to poach customers from B and retain them
	‘B’ to be better off over ‘A’ trying to poach customers from A and retain them	Both worse off – Unlikely to see customer loyalty while spending money on promotions

The picture explains better.  It is not merely in oligopoly, even in monopolistic competition we may find hints of prisoner's dilemma taking roots.