Are manufacturer advertising and retail price promotions substitutes or complements? This is an important question that is quite controversial with the shift in expenditures from advertising to price promotions. For example, over the last two decades, sales promotions have increased substantially at the cost of manufacturer advertising. In 2000 alone, retailers sold nearly $100 billions worth of grocery products on deal to consumers. Proponents of sales promotions interpret these changes as the result of the increasing awareness of the power of sales promotions. Critics of sales promotions assail it as the cause of the decline of national brands and the growth of generics.

Manufacturers induce retailers to promote their brands by offering them trade promotions, and by advertising directly to consumers. The key issue is whether retailers should price promote the heavily advertised brands more or less than the less advertised brands? This issue of whether advertising suppresses or stimulates retail price promotion has not been addressed in the literature.

This article provides insight into the relationship between manufacturer advertising and retail price promotion. It does so through a theoretical analysis of the game played between manufacturers and retailers when setting their advertising and promotion levels, and through an empirical analysis of relationship between manufacturer advertising and retail promotions.

The game theoretic analysis is based on understanding the dual roles that advertising can play in this context. That is, advertising can be either primarily informative, helping consumers make better choices, or it can be primarily differentiating, building brand loyalty and lowering consumers' price sensitivity. We show that the relationship between manufacturer advertising and retail price promotion is mediated by which of these two roles advertising plays. If advertising provides information and increases consumer response to price promotions, then advertising and retail promotion will be positively related. Retailers would offer larger discounts and promote advertised brands more frequently. On the other hand, if advertising intensifies brand loyalty by differentiation and decreases promotional price sensitivity, then advertising and retail price promotion will be negatively related. Retailers would offer smaller discounts and promote advertised brands less frequently.

Thus, the actual relationship between manufacturer advertising and retail price promotion is an empirical issue that depends on whether advertising plays an informative or a differentiation role. We test this relationship through an empirical analysis of 82 grocery products. We find a strong positive relationship between manufacturer advertising and the size and frequency of retail price discounts. This finding supports the informative role of advertising.

The implication for retailers is that they should be more willing to pass through the trade deals offered by manufacturers and increase the frequency and depth of discount for brands in highly advertised categories. If competition is predominantly across brands within a store, then, because advertising plays an informative role and increases price competition, manufacturers in highly advertised categories may need to offer greater trade deals. Manufacturers may need to view their promotion decision not in terms of investing in advertising or trade promotion, but in terms of investing in both advertising and trade promotion, or not at all.