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An Empirical Investigation of the Dynamic Effect of Marlboro's Permanent Pricing Shift

Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213, and Cheung Kong Graduate School of Business, Beijing 100738, China
Leonard N. Stern School of Business, New York University, New York, New York 10012
taochen{at}rhsmith.umd.edu
bsun{at}andrew.cmu.ed
vsingh{at}stern.nyu.edu

The strategy Philip Morris adopted in 1993 featured a one-time, permanent, publicly announced price cut, an event referred to as Marlboro Friday. Little is known about the impact of permanent and publicly announced price cuts on consumer brand switching behaviors for an addictive product. In the context of Marlboro Friday, we investigate (1) how consumers' brand choices are affected by a permanent price cut, (2) whether differential and dynamic effects of permanent price cuts occur for different types of consumers, and (3) the implications of publicly announced permanent price cuts on consumer brand switching behavior in the long run. We develop a dynamic structural brand choice model that allows for consumer forward-looking behavior, learning, and addiction, and investigate how consumers adjusted their brand choice behaviors before and after this permanent price cut. Using unique consumer panel data pertaining to cigarette purchases before and after the event, we provide behavioral explanations of whether and how the drastic and permanent price cut represented an effective step to encourage brand switching for an addictive product and a necessary step for Philip Morris to combat the growing market share of generic brands.

Key Words: Marlboro Friday; permanent price cut; brand switching; choice model; uncertainty; learning; price expectation; risk aversion; addiction; dynamic structural model
History: Received: August 1, 2006; accepted: March 19, 2008.