Competitive reaction- and feedback effects based on VARX models of pooled store data

• Published in: International journal of research in marketing 2005-12, Vol.22 (4), p.415-426
• Main Authors: Horváth, Csilla, Leeflang, Peter S.H., Wieringa, Jaap E., Wittink, Dick R.
• Format: Article
• Language: English
• Subjects: Competition; Cumulative promotion effects; Decomposition of reaction functions; Economic theory; Pooled data; Studies; VARX modelling
• ISSN: 0167-8116; 1873-8001
• DOI: 10.1016/j.ijresmar.2005.09.007

We apply a model that accommodates dynamic phenomena in demand- and reaction functions. The latter functions capture reactions to actions as well as to consequences of actions. We estimate a fixed effects VARX model with dynamic and interactive effects for multiple brands based on pooled time series and cross-sectional data for two product categories. The Impulse Response Analysis (IRA) results for one category (tuna) under different scenarios show that the inclusion/exclusion of competitive reaction- and feedback effects matters a lot, consistent with a high degree of competitive interaction in this market. We find that the role of cross-brand feedback effects is greater than the role of traditional competitive reaction effects. Intrafirm effects (internal decisions) also play an important role. In a decomposition study we show that the exclusion of these effects may either increase (up to 12%) or decrease (by as much as 50%) the net unit sales effect of a 20% price reduction. By contrast, in the second category (shampoo), where brands have distinct positions, the exclusion of these effects matters very little.