MODELS OF COMPETITIVE PRICE PROMOTIONS: SOME  EMPIRICAL EVIDENCE       
               FROM  THE  COFFEE  AND  SALTINE CRACKERS MARKETS               

                            J. Miguel Villas-Boas                            


                            Haas School of Business                           
                     University of California at Berkeley                     
                                                             

                                   ABSTRACT
                            
     This  paper  presents  tests  of  the  competitive  rationale  for  price 
promotions proposed by Varian (1980). In a model with a population of informed 
and uninformed customers, price competition yields  a  static  equilibrium  in 
which each seller draws a price from a specified density function. Price  data 
on coffee and saltine crackers products are used to test whether the sample of 
prices on each  product  could  have  possibly  come  from  the  theoretically 
specified density function. The results suggest that some markets  are  indeed 
consistent with the marginal distributions of prices predicted by  the  model. 
Furthermore, in the process of testing this rationale  for  price  promotions, 
estimates are obtained for the marginal cost of each product,  the  number  of 
competing goods, and the  percentage  of  informed  consumers.  The  resulting 
excess variability of these estimates across competing brands can  also  raise 
questions with respect to the empirical validity of the model.