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How should price promotion strategies be modified in an emerging market (e.g., India, China) compared to those employed in developed markets (e.g., USA, Canada)? Specifically, how should the presence of middle-class consumers with limited ability to pay, prevalent in an emerging market, influence the depth and frequency of price promotions offered by competing firms? Lay intuition suggests that firms should promote more frequently and offer deeper discounts in emerging markets, in order to effectively sell to limited income, middle-class consumers. We construct a theoretical model that investigates the effect of the middle-class segment on firms' price promotion strategies. Contrary to lay intuition, our analysis reveals precisely the opposite results. First, price promotions offered in an emerging market (with middle-class consumers) are shallower than those offered in a developed market (without middle-class consumers). Second, relatively deep price promotions occur less frequently in an emerging market, compared to a developed market. These theoretical findings are consistent with the empirical evidence we gathered from the supermarkets in India and in Canada.

More firms are paying increasing attention to emerging markets. Retail sales in China and India have grown by 76.3% and 76% respectively during 2005–2010, while growth has been slower at 12.4% and 10.6% in Canada and USA (EuroMonitor, 2011). However, many unique characteristics of emerging markets, particularly the presence of the rapidly growing segment of middle-class consumers, necessitate the reexamination of pricing strategies adopted in these markets. This paper investigates how should the limited ability to pay of middle-class consumers in emerging markets (e.g., India, China) influence price promotion strategies, compared to those employed in developed markets (e.g., USA, Canada). More specifically: 1. Should the magnitude of price promotions set by firms in an emerging market exceed the magnitude set in a developed market? 2. Should firms set deep promotions relatively more frequently in an emerging market, compared to a developed market? Consider the Indian market as an example of an emerging market with middle-class consumers. Middle-class consumers are defined by the Asian Development Bank (2010) as consumers whose per capita consumption was $2–$20 per day in 2008. They constituted 5% of the Indian population in 2005 and are projected to rise to 41% by 2025 (McKinsey and Company, 2007). Despite having limited ability to pay at an individual level, such rapid expansion in their number means that they collectively have considerable purchasing power (Prahalad, 2009). This is consistent with the Affluence Layers Based on Income classification of the Indian market by the National Council of Applied Economic Research (See Bijapurkar, 2007, page 74), summarized in Table 1. The Indian consumer market contains aspirers, seekers and strivers, whose annual household income ranges between $2000 and $20,000 and who collectively account for approximately 28% of the market. In contrast, the rich consumers in this market earn over $20,000 annually.

In this paper, we developed a theoretical model of price competition between firms operating in emerging markets characterized by the presence of middle-class consumers with limited ability to pay. We find that the presence of these consumers leads the firms to offer smaller average discounts as well as to decrease the frequency of deep price promotions. Also, we analyze the prices of products within four CPG categories sold by multiple retailers in India and in North America. Consistent with our theoretical results, we find that while deep price promotions (exceeding 20%) are very frequent in North America, they are rarely used in India. Also, we find that the average promotion depth is smaller in India. Future research on pricing in emerging markets can take into account that small, independent shops constitute a large share of the retail market in such countries. It would be interesting to analyze how large firms competing with these small mom-and-pop stores should adjust their pricing strategies.