Structural Analysis of Competitive Behavior : New Empirical Industrial Organization Methods in Marketing

The impact of a firm's strategic marketing mix choices on profitability can be evaluated by understanding the impact of those choices on consumer demand for the firm's products and on the firm's costs. Additionally, a firm's strategic marketing mix choices, and its demand and costs can be affected by rival firms' strategic choices. Therefore, to understand the effects of choice of marketing mix on profitability, we have to understand its effects on demand, cost and competitor reactions. The effects of choices of marketing mix on consumer demand have been analyzed in great depth in marketing, but research on the strategic reactions of competitors to such choices have been far more limited. The New Empirical Industrial Organization (NEIO) framework provides us with a source of methods that has potential to substantially add to our insights about competitive interactions among firms. In this paper, we first discuss a simple NEIO model to illustrate the basic methodology. We then discuss the contributions of this literature to our knowledge of competitive marketing strategy. In the process, we discuss methodological extensions of the basic model that are needed to model the institutional realities of specific markets. We also summarize how the existing literature has evolved, and provide our view of where the literature might profitably proceed from here. In particular, we discuss how future methodological innovations in the dynamics of competition, discrete strategy choice, and asymmetric information estimation will enable wider application of this methodology to competitive marketing strategy issues. The main advantage of NEIO studies is that they provide greater understanding of the competitive behavior in specific markets or industries compared to cross-sectional studies across industries. Bountiful opportunities exist for additional studies that focus on similar phenomena in different markets to draw generalizable conclusions from this line of research