Essays on competitive structure and product-harm crises
AbstractThis thesis is a collection of three empirical essays focusing on two important research topics, i.e. (i) competitive structure and (ii) product-harm crises. Competitive structure In the first two empirical essays, we study store competition in two local-service sectors, i.e. the video-rental and the grocery industry. In the considered sectors, collecting data on different marketing and/or performance variables for all players in the market is very difficult. Not only are these industries typically very fragmented because of localized competition, more service-related -and often less directly observable- aspects of competition are important as well. Because of these issues, gathering detailed data on all components of competition for all players in a local-service sector quickly becomes impossible. Therefore, we use empirical-entry models that have been developed in the industrial organization literature to evaluate market competition (e.g., Bresnahan and Reis 1991; Berry 1992). The general idea is to infer information on the degree of competition from the observed entry decisions, and its relationship with local market size and other market characteristics. Firms’ strategies are represented by discrete decisions, i.e. whether or not to enter a local market. As we assume that firms are profit maximizing, the actual (observed) market structures are used to uncover information on the underlying (unobserved) profitability. As a consequence, this framework allows us to study profit determinants and the role of competition without directly observing any detailed firm-level information. In the first essay, we study competition in the Belgian video-rental market. This sector is characterized by players offering relatively homogenous products. Therefore, to study competition in this market, we make abstraction from the identity of the particular players in the market, and estimate the relationship between the total number of entrants and the observed market characteristics using an ordered probit model. We find that competition amongst video stores increases with every entry in a local market. However, in contrast to the predictions of most economic theories, the increase in competition is larger when entry occurs in a duopoly than in a monopoly. Apart from the insights on the extent of competition in the video-rental industry, the applied framework also allows us to study the impact on profitability of other characteristics of the local market. As such, we find a significant cannibalization effect of movie theatres nearby, while the proportion of premium cable subscribers has an insignificant impact. In addition, we establish that various socio-demographic characteristics of the trading zone, such as income and household size, have a significant impact on video store performance. The second essay focuses on the German grocery industry. Grocery retailing has undergone an intense transformation during the past decades, including the emergence and growth of several new retail formats and concepts. Especially the discounter format has revolutionized the industry. These low-price low-service grocery stores are a source of considerable concern for supermarkets, as they have now captured a considerable market position in almost all Western economies. We study competition within and between the supermarket and discounter format. We develop a model with format-specific profit functions, while accounting for different socio-demographic and competitive effects. We find evidence for an extensive amount of intra-format competition for both supermarkets and discounters, although the extent of rivalry is more pronounced amongst supermarkets. Also inter-format competition is present for both store types, although the competitive effects only become significant from the third discounter and second supermarket onwards. Contrary to intra-format competition, the extent of rivalry between formats is the same for supermarkets and discounters. Product-harm crises Product-harm crises – defined as “discrete, well publicized occurrences wherein products are found to be defective or dangerous” (Siomkos and Kurzbard 1994) - are prevalent in the marketplace. Recent examples of product-harm crises include the recall of contaminated coca-cola in several European countries, and the Japanese Snow brand milk food-poisoning scandal. The impact of this type of crises on society is huge, while also affected companies may suffer substantially from a product-harm crisis. Despite the enormous impact of product-harm crises on society and on affected companies, research on the topic is still relatively scant. While several experimental studies have demonstrated the important moderating impact of certain consumer characteristics on their reactions to a (hypothetical) product-harm crisis (e.g. Ahluwalia, Burnkrant, and Unnava 2000), these papers suffer from a number of important external validity issues. Researchers in these studies often attract attention artificially to the crisis, and respondent’s stated intentions may not always reflect their real purchase behavior. Moreover, the effect of tactical marketing variables and important marketplace dynamics are typically not accounted for. In the third empirical essay, we use household scanner data that record consumer purchases before, during, and after a real-life product-harm crisis, i.e. the Australian peanut-butter case. Within this context, we use a multiple-event hazard model to study the effect of consumer characteristics and post-crisis advertising on the timing of the first-purchase decision after the crisis of the affected brands. We find that brand equity offers an important protection against a product-harm crisis as both loyal and more familiar consumers repurchase the affected brands sooner. However, this protection decreases over time, as is reflected in a negative interaction effect of loyalty and time. We also observe a decreasing impact with time of a previous experience with the brand. In addition, we show that pre-crisis category usage has a positive impact on the trial probability, although this effect may be cancelled out because of a decreased consumption during the crisis period. Finally, we demonstrate that after-crisis communication can indeed be very effective, although we find this only to be true for the stronger of the two considered brands. In turn, competitive advertising delays the purchase of both affected brands after the crisis.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:1979/502.
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