Differences in Dynamic Brand Competition Across Markets: An Empirical Analysis

We investigate differences in the dynamics of marketing decisions across geographic markets empirically. We begin with a linear-quadratic game involving forward-looking firms competing on prices and advertising. Based on the corresponding Markov perfect equilibrium, we propose estimable econometric equations for demand and marketing policy. Our model allows us to measure empirically the strategic response of competitors along with economic measures such as firm profitability. We use a rich dataset that combines sales, marketing mix, factor cost, and advertising cost data for eighteen geographic markets in the frozen entrée category. We find that larger markets tend to be less price-sensitive and more profitable than smaller markets. We also find evidence of positive carryover of own advertising on own demand. In terms of consumer substitution patterns, we find that the role of advertising (in our data) seems to be more category-building (complementary) than share-stealing (competitive). The complementary role is stronger in larger markets. On the supply side, we find that firms make smaller adjustments to own advertising as goodwill goes up. Consistent with cross-advertising effects on demand, firms make smaller (larger) adjustments to advertising in response to competitive goodwill in the less competitive larger (in the more competitive smaller) markets. Finally, we find that consumer welfare decreases (increases) in larger (smaller) markets when firms move to a zero-advertising regime.