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Investigating dynamic multifirm market interactions in price and advertising

Vilcassim, Naufel J., Kadiyali, Vrinda and Chintagunta, Pradeep K. (1999) Investigating dynamic multifirm market interactions in price and advertising. Management Science, 45 (4). pp. 499-518. ISSN 0025-1909

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Identification Number: 10.1287/mnsc.45.4.499

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.

Item Type: Article
Official URL: http://pubsonline.informs.org/journal/mnsc
Additional Information: © 1999 INFORMS
Divisions: Management
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
Sets: Departments > Management
Date Deposited: 01 Mar 2017 09:56
Last Modified: 20 Dec 2019 01:50
URI: http://eprints.lse.ac.uk/id/eprint/69454

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