IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v24y2005i1p25-34.html
   My bibliography  Save this article

Planning Marketing-Mix Strategies in the Presence of Interaction Effects

Author

Listed:
  • Prasad A. Naik

    (University of California Davis, 1 Shields Avenue, Davis, California 95616)

  • Kalyan Raman

    (Loughborough Business School, Loughborough University, Ashby Road, Loughborough, Leicestershire, United Kingdom LE11 3TU)

  • Russell S. Winer

    (Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012)

Abstract

Companies spend millions of dollars on advertising to boost a brand's image and simultaneously spend millions of dollars on promotion that many believe calls attention to price and erodes brand equity. We believe this paradoxical situation exists because both advertising and promotion are necessary to compete effectively in dynamic markets. Consequently, brand managers need to account for interactions between marketing activities and interactions among competing brands. By recognizing interaction effects between activities, managers can consider interactivity trade-offs in planning the marketing-mix strategies. On the other hand, by recognizing interactions with competitors, managers can incorporate strategic foresight in their planning, which requires them to look forward and reason backward in making optimal decisions. Looking forward means that each brand manager anticipates how other competing brands are likely to make future decisions, and then by reasoning backward deduces one's own optimal decisions in response to the best decisions to be made by all other brands. The joint consideration of interaction effects and strategic foresight in planning marketing-mix strategies is a challenging and unsolved marketing problem, which motivates this paper. This paper investigates the problem of planning marketing mix in dynamic competitive markets. We extend the Lanchester model by incorporating interaction effects, constructing the marketing-mix algorithm that yields marketing-mix plans with strategic foresight, and developing the continuous-discrete estimation method to calibrate dynamic models of oligopoly using market data. Both the marketing-mix algorithm and the estimation method are general, so they can be applied to any other alternative model specifications for dynamic oligopoly markets. Thus, this dual methodology augments the decision-making toolkit of managers, empowering them to tackle realistic marketing problems in dynamic oligopoly markets. We illustrate the application of this dual methodology by studying the dynamic Lanchester competition across five brands in the detergents market, where each brand uses advertising and promotion to influence its own market share and the shares of competing brands. Empirically, we find that advertising and promotion not only affect the brand shares (own and competitors') but also exert interaction effects, i.e., each activity amplifies or attenuates the effectiveness of the other activity. Normatively, we find that large brands underadvertise and overspend on promotion, while small brands underadvertise and underpromote. Finally, comparative statics reveal managerial insights into how a specific brand should respond optimally to the changes in a competing brand's situation; more generally, we find evidence that competitive responsiveness is asymmetric.

Suggested Citation

  • Prasad A. Naik & Kalyan Raman & Russell S. Winer, 2005. "Planning Marketing-Mix Strategies in the Presence of Interaction Effects," Marketing Science, INFORMS, vol. 24(1), pages 25-34, June.
  • Handle: RePEc:inm:ormksc:v:24:y:2005:i:1:p:25-34
    DOI: 10.1287/mksc.1040.0083
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1040.0083
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mksc.1040.0083?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kamel Jedidi & Carl F. Mela & Sunil Gupta, 1999. "Managing Advertising and Promotion for Long-Run Profitability," Marketing Science, INFORMS, vol. 18(1), pages 1-22.
    2. Prasad A. Naik & Murali K. Mantrala & Alan G. Sawyer, 1998. "Planning Media Schedules in the Presence of Dynamic Advertising Quality," Marketing Science, INFORMS, vol. 17(3), pages 214-235.
    3. Kenneth R. Deal, 1979. "Optimizing Advertising Expenditures in a Dynamic Duopoly," Operations Research, INFORMS, vol. 27(4), pages 682-692, August.
    4. anonymous, 1983. "International economic situation and outlook," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, january/f.
    5. Fruchter, Gila E. & Kalish, Shlomo, 1998. "Dynamic promotional budgeting and media allocation," European Journal of Operational Research, Elsevier, vol. 111(1), pages 15-27, November.
    6. anonymous, 1983. "Developments in the international economy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, july.
    7. David Besanko & Jean-Pierre Dubé & Sachin Gupta, 2005. "Own-Brand and Cross-Brand Retail Pass-Through," Marketing Science, INFORMS, vol. 24(1), pages 123-137, July.
    8. Harald J. van Heerde & Peter S. H. Leeflang & Dick R. Wittink, 2004. "Decomposing the Sales Promotion Bump with Store Data," Marketing Science, INFORMS, vol. 23(3), pages 317-334, December.
    9. -, 1983. "Notas sobre la economía brasileña en 1982," Oficina de la CEPAL en Brasilia (Estudios e Investigaciones) 28369, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    10. anonymous, 1983. "The budget and macro-economic policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, september.
    11. Gerald L. Thompson & Jinn-Tsair Teng, 1984. "Optimal Pricing and Advertising Policies for New Product Oligopoly Models," Marketing Science, INFORMS, vol. 3(2), pages 148-168.
    12. Sridhar Moorthy, 2005. "A General Theory of Pass-Through in Channels with Category Management and Retail Competition," Marketing Science, INFORMS, vol. 24(1), pages 110-122, August.
    13. Jorge M. Silva-Risso & Randolph E. Bucklin & Donald G. Morrison, 1999. "A Decision Support System for Planning Manufacturers' Sales Promotion Calendars," Marketing Science, INFORMS, vol. 18(3), pages 274-300.
    14. anonymous, 1983. "New Zealand economic chronology 1982," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 46, january/f.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Harald Van Heerde & Kristiaan Helsen & Marnik G. Dekimpe, 2007. "The Impact of a Product-Harm Crisis on Marketing Effectiveness," Marketing Science, INFORMS, vol. 26(2), pages 230-245, 03-04.
    2. Harald J. van Heerde & Shuba Srinivasan & Marnik G. Dekimpe, 2010. "Estimating Cannibalization Rates for Pioneering Innovations," Marketing Science, INFORMS, vol. 29(6), pages 1024-1039, 11-12.
    3. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.
    4. Gao Lu Zou & Kwong Wing Chau, 2015. "Determinants and Sustainability of House Prices: The Case of Shanghai, China," Sustainability, MDPI, vol. 7(4), pages 1-25, April.
    5. Papell, David H, 1986. "Exchange Rate and Current Account Dynamics under Rational Expectations: An Econometric Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 583-600, October.
    6. Jennifer L. Castle & Jurgen A. Doornik & David F. Hendry & Felix Pretis, 2015. "Detecting Location Shifts during Model Selection by Step-Indicator Saturation," Econometrics, MDPI, vol. 3(2), pages 1-25, April.
    7. Moniruzzaman, Shaikh, 2015. "Crop choice as climate change adaptation: Evidence from Bangladesh," Ecological Economics, Elsevier, vol. 118(C), pages 90-98.
    8. Maurizio Bigotta & Jaya Krishnakumar & Uma Rani, 2015. "Further results on the regression-based approach to inequality decomposition with evidence from India," Empirical Economics, Springer, vol. 48(3), pages 1233-1266, May.
    9. Krishnamoorthy, Anand & Prasad, Ashutosh & Sethi, Suresh P., 2010. "Optimal pricing and advertising in a durable-good duopoly," European Journal of Operational Research, Elsevier, vol. 200(2), pages 486-497, January.
    10. Martín-Herrán, Guiomar & Sigué, Simon-Pierre & Zaccour, Georges, 2010. "The Dilemma of Pull and Push-Price Promotions," Journal of Retailing, Elsevier, vol. 86(1), pages 51-68.
    11. Ailawadi, Kusum L. & Beauchamp, J.P. & Donthu, Naveen & Gauri, Dinesh K. & Shankar, Venkatesh, 2009. "Communication and Promotion Decisions in Retailing: A Review and Directions for Future Research," Journal of Retailing, Elsevier, vol. 85(1), pages 42-55.
    12. S. Sriram & Manohar U. Kalwani, 2007. "Optimal Advertising and Promotion Budgets in Dynamic Markets with Brand Equity as a Mediating Variable," Management Science, INFORMS, vol. 53(1), pages 46-60, January.
    13. Kusum L. Ailawadi & Praveen K. Kopalle & Scott A. Neslin, 2005. "Predicting Competitive Response to a Major Policy Change: Combining Game-Theoretic and Empirical Analyses," Marketing Science, INFORMS, vol. 24(1), pages 12-24, September.
    14. Horowitz, Marvin J., 1989. "Energy efficiency improvements and investment behavior in small commercial buildings," Energy, Elsevier, vol. 14(11), pages 697-707.
    15. McColl, Rod & Macgilchrist, Renaud & Rafiq, Shuddhasattwa, 2020. "Estimating cannibalizing effects of sales promotions: The impact of price cuts and store type," Journal of Retailing and Consumer Services, Elsevier, vol. 53(C).
    16. Michel Wedel & Jie Zhang & Fred Feinberg, 2015. "Implementing Retail Category Management: a Model-Based Approach to Setting Optimal Markups," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(2), pages 165-176, June.
    17. Hall, Joseph M. & Kopalle, Praveen K. & Krishna, Aradhna, 2010. "Retailer Dynamic Pricing and Ordering Decisions: Category Management versus Brand-by-Brand Approaches," Journal of Retailing, Elsevier, vol. 86(2), pages 172-183.
    18. Jie Wu & Zhixin Chen & Xiang Ji, 2020. "Sustainable trade promotion decisions under demand disruption in manufacturer-retailer supply chains," Annals of Operations Research, Springer, vol. 290(1), pages 115-143, July.
    19. Chadwick J. Miller & Daniel C. Brannon & Jim Salas & Martha Troncoza, 2021. "Advertising, incentives, and the upsell: how advertising differentially moderates customer- vs. retailer-directed price incentives’ impact on consumers’ preferences for premium products," Journal of the Academy of Marketing Science, Springer, vol. 49(6), pages 1043-1064, November.
    20. Craig J. Chapman & Thomas J. Steenburgh, 2011. "An Investigation of Earnings Management Through Marketing Actions," Management Science, INFORMS, vol. 57(1), pages 72-92, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:24:y:2005:i:1:p:25-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.