Discount Spirits Pricing#
Week 5 — Elasticity#
Where we left off#
- Weeks 3 and 4: cost structure and tax structure, both fixed
- neither explains why some categories are discounted far harder
- a tax argument predicts the shelf price, not the promotion on it
- this week: the demand side
The category is not discounted because its margins are generous. It is discounted because the volume response pays for the discount, which is a different claim with a different remedy.
— Price Elasticity of Ready-to-Drink Spirit Cans (Journal of Consumer Retail Studies, 2022)
Learning objectives#
By the end of this lecture you should be able to:
- define price elasticity of demand against discount depth
- state the elasticity gap between RTDs and wine or beer
- explain that gap in terms of loyalty and substitutability
- say why deeper, more frequent discounting is rational here
The measurement#
Hold the discount depth constant. Measure the volume response.
| Category | Relative elasticity |
|---|---|
| Ready-to-drink cans | ~2× |
| Packaged beer | baseline |
| Wine | baseline |
RTDs move roughly double the volume that wine or beer moves under the same discount.
Why this category#
Two causes, per the reading:
- weak brand loyalty — the category is young, and its brands are not strongly differentiated in the way beer’s are
- easy substitution — at a fixed standard-drink price, one RTD is a very close substitute for another
Neither is true of wine, where varietal and region do real work in the purchase decision.
The volume response pays for the discount#
The retailer’s arithmetic#
- a deeper discount cuts per-unit margin
- in an elastic category, volume rises by more than margin falls
- so the discount is profitable, not a loss leader
- and the deeper and more frequent it is, the more it earns
This is why week 4’s tax structure cannot, on its own, explain the promotional pattern you see in the aisle.
What this means for your index#
- an RTD’s index moves a lot, and moves often
- a single observation of that price is a snapshot of a cycle
- timestamp every price you record, from this week onward
- week 9’s scrape depends on this habit existing already
Common errors#
- estimating elasticity from price alone, with no volume data, and reporting it as though it were measured
- mistaking a recurring promotion for a structural repricing
- assuming a large percentage discount moves the index by as much — RTD cans carry few standard drinks per unit, so it usually does not
- generalising a single retailer’s promotional calendar to the category
Where this connects#
- week 7 asks where an elastic category gets placed in the store, given this response
- week 8 examines the display built around that placement
- the week 5 lab has you estimate elasticity from the only data a shopper can actually see, and write down what that estimate assumes
Next week#
Volumetric excise: the tax design that closes week 4’s gap, and what it charges for doing so.