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Multinomial Logit Market Share Models: Equilibrium Characteristics and Strategic Implications

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  • Suman Basuroy

    (Faculty of Management, Rutgers University, 180 University Avenue, Newark, New Jersey 07102)

  • Dung Nguyen

    (Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260)

Abstract

We specify and analyze the conditions under which the MNL market share models are appropriate for equilibrium analysis. Our results show that a linear price response function as is often used in empirical research, in conjunction with the typical concavity assumed in a large range of marketing response functions, would yield an interior equilibrium solution. We then consider the optimal reactions on pricing and marketing spending to entry and potential market expansion. In the context of the MNL models, we demonstrate that the entry of a new brand evokes a decrease in the equilibrium prices of the existing brands as a defensive reaction. This is true in both an expanding market as well as a fixed market. However, while new entry into a fixed market would trigger the incumbents to lower the marketing expenditure, we show that firms tend to raise marketing activities as they experience market expansion. Consequently, there exist distinct possibilities that marketing efforts for the existing brands increase in view of entry in an expanding market. Further managerial and marketing implications for endogeneity of the number of firms are explored.

Suggested Citation

  • Suman Basuroy & Dung Nguyen, 1998. "Multinomial Logit Market Share Models: Equilibrium Characteristics and Strategic Implications," Management Science, INFORMS, vol. 44(10), pages 1396-1408, October.
  • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:10:p:1396-1408
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    File URL: http://dx.doi.org/10.1287/mnsc.44.10.1396
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    References listed on IDEAS

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    Cited by:

    1. Mesak, Hani I. & Bari, Abdullahel & Blackstock, Rob, 2016. "On the robustness and strategic implications of a parsimonious advertising – inventory competitive model with extensions to pricing competition," International Journal of Production Economics, Elsevier, vol. 180(C), pages 38-47.
    2. Ulrike Schuster & J?rgen W?ckl, 2005. "Optimal Defensive Strategies under Varying Consumer Distributional Patterns and Market Maturity," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 1(2), pages 187-206, July.
    3. Weixin Shang & Liming Liu, 2011. "Promised Delivery Time and Capacity Games in Time-Based Competition," Management Science, INFORMS, vol. 57(3), pages 599-610, March.
    4. Benati, Stefano & Hansen, Pierre, 2002. "The maximum capture problem with random utilities: Problem formulation and algorithms," European Journal of Operational Research, Elsevier, vol. 143(3), pages 518-530, December.
    5. Gérard P. Cachon & A. Gürhan Kök, 2007. "Category Management and Coordination in Retail Assortment Planning in the Presence of Basket Shopping Consumers," Management Science, INFORMS, vol. 53(6), pages 934-951, June.
    6. Javier Santiago Ortiz Correa, 2003. "La rentabilidad desde la organización industrial: Una revisión de trabajos," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT, April.
    7. Admiraal, P-H. & Carree, M.A., 2000. "Competition and Market Dynamics on the Russian Deposits Market," ERIM Report Series Research in Management ERS-2000-25-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    8. Gérard P. Cachon & Christian Terwiesch & Yi Xu, 2008. "On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market," Marketing Science, INFORMS, vol. 27(3), pages 461-473, 05-06.
    9. Aravindakshan Ashwin & Ratchford Brian, 2011. "Solving Share Equations in Logit Models Using the LambertW Function," Review of Marketing Science, De Gruyter, vol. 9(1), pages 1-19, April.
    10. Awi Federgruen & Nan Yang, 2009. "Competition Under Generalized Attraction Models: Applications to Quality Competition Under Yield Uncertainty," Management Science, INFORMS, vol. 55(12), pages 2028-2043, December.
    11. Timothy Park & Ashok K. Mishra & Shawn J. Wozniak, 2014. "Do farm operators benefit from direct to consumer marketing strategies?," Agricultural Economics, International Association of Agricultural Economists, vol. 45(2), pages 213-224, March.

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