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Investigating Dynamic Multifirm Market Interactions in Price and Advertising

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  • Naufel J. Vilcassim

    (Marshall School of Business, University of Southern California, Los Angeles, California 90098)

  • Vrinda Kadiyali

    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Pradeep K. Chintagunta

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

Abstract

Diagnosing the nature and magnitude of competitive interactions among firms is important for developing effective marketing strategies. In this paper, we formulate a game-theoretic model of firm interaction to analyze the dynamic price and advertising competition among firms in a given product market. Firm (or brand) level demand functions account for the contemporaneous and carry-over effects of these marketing activities, and also allow for the effects of competitor actions. Firms take into consideration the actions of their rivals, as well as their own demand and cost functions (both production and advertising) when determining the profit-maximizing price and advertising levels. Our formulation enables us to quantify not only the direction and magnitude of competitive reactions, but also to identify the underlying form of market conduct that generates the particular pattern of interaction. We specify and estimate a fully structural econometric model for three firms constituting a distinct sub-market within a personal-care product category. We estimate the demand and competitive interaction parameters, as well as the production and advertising cost functions for each firm. We then derive implications for competitive interactions and market structure. Interestingly, we find that while firms seem to compete on advertising, they price cooperatively, thereby enhancing their price-cost margins.

Suggested Citation

  • Naufel J. Vilcassim & Vrinda Kadiyali & Pradeep K. Chintagunta, 1999. "Investigating Dynamic Multifirm Market Interactions in Price and Advertising," Management Science, INFORMS, vol. 45(4), pages 499-518, April.
  • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:4:p:499-518
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    File URL: http://dx.doi.org/10.1287/mnsc.45.4.499
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    References listed on IDEAS

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    Cited by:

    1. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.
    2. Shinn-Shyr Wang & Kyle W. Stiegert & Tirtha P. Dhar, 2010. "Strategic Pricing Behavior under Asset Value Maximization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(2), pages 151-170, June.
    3. Karray Salma & Martín-Herrán Guiomar, 2008. "Investigating the Relationship Between Advertising and Pricing in a Channel with Private Label Offering: A Theoretic Model," Review of Marketing Science, De Gruyter, vol. 6(1), pages 1-39, August.
    4. 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.
    5. Choi, Sungchul & Fredj, Karima, 2013. "Price competition and store competition: Store brands vs. national brand," European Journal of Operational Research, Elsevier, vol. 225(1), pages 166-178.
    6. Chih-Jen Wang & Ying-Ju Chen & Chi-Cheng Wu, 2011. "Advertising competition and industry channel structure," Marketing Letters, Springer, vol. 22(1), pages 79-99, March.
    7. Marco Giarratana & Alessandra Perri, 2014. "Product and Marketing Actions in a Competitive Scenario," Working Papers 30, Department of Management, Università Ca' Foscari Venezia.
    8. Jean-Pierre Dubé & Günter Hitsch & Puneet Manchanda, 2005. "An Empirical Model of Advertising Dynamics," Quantitative Marketing and Economics (QME), Springer, vol. 3(2), pages 107-144, June.
    9. Eric T. Bradlow & Young-Hoon Park, 2007. "Bayesian Estimation of Bid Sequences in Internet Auctions Using a Generalized Record-Breaking Model," Marketing Science, INFORMS, vol. 26(2), pages 218-229, 03-04.
    10. Marinelli, Carlo, 2007. "The stochastic goodwill problem," European Journal of Operational Research, Elsevier, vol. 176(1), pages 389-404, January.
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    12. Karray, Salma & Martín-Herrán, Guiomar, 2009. "A dynamic model for advertising and pricing competition between national and store brands," European Journal of Operational Research, Elsevier, vol. 193(2), pages 451-467, March.
    13. Lu, Jye-Chyi & Tsao, Yu-Chung & Charoensiriwath, Chayakrit & Dong, Ming, 2012. "Dynamic decision-making in a two-stage supply chain with repeated transactions," International Journal of Production Economics, Elsevier, vol. 137(2), pages 211-225.
    14. He, Xi & Lopez, Rigoberto, 2016. "Do Firms Price and Advertise to Maximize Profits? Evidence from U.S. Food Industries," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235436, Agricultural and Applied Economics Association.
    15. Richards, Timothy J. & Patterson, Paul M., 2006. "Firm-Level Competition in Price and Variety," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 38(03), December.
    16. Richards, Timothy J., 2004. "Price and Product-Line Rivalry Among Supermarket Retailers," Working Papers 28535, Arizona State University, Morrison School of Agribusiness and Resource Management.
    17. Pradeep Chintagunta & Tülin Erdem & Peter E. Rossi & Michel Wedel, 2006. "Structural Modeling in Marketing: Review and Assessment," Marketing Science, INFORMS, vol. 25(6), pages 604-616, 11-12.
    18. Sheng, Li, 2010. "Competing or cooperating to host mega events: A simple model," Economic Modelling, Elsevier, vol. 27(1), pages 375-379, January.
    19. Michaela Draganska & Dipak Jain, 2004. "A Likelihood Approach to Estimating Market Equilibrium Models," Management Science, INFORMS, vol. 50(5), pages 605-616, May.
    20. Lu, Jye-Chyi & Tsao, Yu-Chung & Charoensiriwath, Chayakrit, 2011. "Competition under manufacturer service and retail price," Economic Modelling, Elsevier, vol. 28(3), pages 1256-1264, May.
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