Defensive Marketing Strategies: An Equilibrium Analysis Based on Decoupled Response Function Models

The entry of a new product (attacker) into a competitive market is likely to provoke responses from some or all of the existing products (defenders). This paper investigates the development of optimal defensive strategies based on an understanding of the possible reactions of all the defenders to an optimal attack. Following Lane (Lane, W. J. 1980. Product differentiation in a market with endogenous sequential entry. Bell J. Econom. 11(1, Spring) 237--260.) we assume that N products each enter sequentially with perfect foresight on subsequent entry. Then, based on new technology, an unanticipated attacker enters. The N defenders respond in price but not position according to Lane's model. Once this equilibrium is obtained, advertising and distribution response functions scale sales. We show that under these decoupled response function models of advertising and distribution, uniformly-distributed tastes, and nonincreasing market size, the optimal defense for all existing brands is to decrease their respective prices, advertising, and distribution. Those qualitative results are consistent with recommendations by Hauser and Shugan (Hauser, J. R., S. M. Shugan. 1983. Defensive marketing strategies. Marketing Sci. 2(4, Fall) 319--360.) who used related, but different, consumer response models and a different equilibrium assumption.