Empirical Analysis of Competitive Interaction in Food Product Categories

This paper provides an overview of recent research on estimating competitive interaction in food product categories. In particular, the focus of this review is on research using scanner data conducted at the disaggregate (e.g., store, chain or local market) level, including empirical studies of vertical (i.e., within-channel) conduct. Studies addressing the competitive interaction on price, as well as non-price variables (e.g., in-store display and feature advertising) are considered. The author first describes the methodologies available for measuring the competitive interaction between firms and then briefly summarizes recent empirical developments. Given the complexity of the interactions that take place in practice, it is argued that much of the richness of actual competitive behavior is lost in aggregate analysis. Competitive interaction is the result of a complex set of variables and influences-demand side factors, market and industry structure, firm "personality", and category characteristics all interact in a complex fashion to determine strategic behavior of retailers and manufacturers.competition, competitive strategy, channel behavior, Agribusiness, Demand and Price Analysis, Industrial Organization,

Testing the Theory: Vertical Strategic Interaction and Demand Functional Form

Formulating theoretical models inevitably requires various simplifications that assist in making analysis tractable and that facilitate deriving closed form solutions. While the strategic insights gained from theoretical models of market phenomena are often quite valuable, testing the theoretical assumptions made in these models can aid in assessing the broader applicability of the conclusions drawn. This is particularly true in the channels area, where the focus of research to date has largely been theoretical in nature. In an initial attempt to examine some of the assumptions made in previous theoretical research (e.g., Jeuland and Shugan 1983, McGuire and Staelin 1983, Choi 1991, Raju, Sethuraman and Dhar 1995), we focus on a limited set of issues. First, we empirically examine the vertical channel assumptions made in two well-cited models of retailer-manufacturer interaction: a) the Choi (1991) Manufacturer-Stackelberg (MS) model, and b) the Raju, Sethuraman and Dhar (1995) Stackelberg model addressing store brands. Specifically, empirical tests are developed for Manufacturer Stackelberg conduct and the use of proportional mark-up rules within the channel. Second, since each of these models assume relatively simple linear demand structures, we examine how well linear demands characterize actual market behavior by comparing them to a flexible non-linear form, the LA/AIDS model. The empirical analysis is conducted using data for six individual categories (milk, butter, bread, pasta, margarine and instant coffee) across 59 local markets in 1991 and 1992. The empirical results generally support the assumptions of proportional mark-up behavior by retailers and Manufacturer Stackelberg conduct (Choi 1991) within the channel. While this lends support to the assumptions made in a number of theoretical models addressing channel behavior, we reject linear demands in a favor of a more flexible non-linear form. When combined with the analytical work of Lee and Staelin (1997), this suggests that additional theoretical and empirical work is needed in order to fully understand the implications of using a linear demand specification.pricing, channels, private labels, competitive strategy, Demand and Price Analysis, Industrial Organization,

Assessing the Competitive Interaction Between Private Labels and National Brands

In contrast to single-equation cross-sectional studies of private label share, developing a complete understanding of the nature of the competitive interaction between national brands and private labels requires an understanding of the determinants of both demand and strategic pricing decisions by firms. Consequently, we estimate a simultaneous system of share and price for private labels and national brands. From the empirical results, two measures of market response are derived. The unilateral demand elasticity measures the pure own demand response, while the residual (or total) elasticity also captures the impact of competitive price reaction (Baker and Bresnahan 1985). When taken together, these provide important strategic insights into the pricing interaction between national brands and private labels. In our empirical analysis, we employ a flexible, non-linear demand specification, the Linear Approximate Almost Ideal Demand System (LA/AIDS, Deaton and Muellbauer 1980a), and specify the price reaction equations derived under the LA/AIDS demand specification. Incorporating LA/AIDS demands into a structural equation framework represents an important departure from previous demand specifications in competitive analysis. Using the proposed LA/AIDS framework, we perform a detailed intra-category analysis using data on six individual categories: bread, milk, pasta, instant coffee, butter and margarine. In addition, in an attempt to generalize the results to a broader set of categories and in order to enable us to compare our results to previous cross-section studies, we also estimate using a sample pooled across 125 categories and 59 geographic markets. Consistent with our objectives, we find that consumer response to price and promotion decisions (demand) and the factors influencing firm pricing behavior (supply) jointly determine observed market prices and market shares. Further, estimates of residual demand elasticities suggest that examination of partial demand elasticities alone may provide an incomplete picture of the ability of brands to raise price. Managerial implications, limitations and suggestion for future research are discussed.competition, competitive strategy, private labels, pricing, Demand and Price Analysis,

Intra- and inter-channel competition in local-service sectors.

Although economically very important, local-service sectors have received little attention in the extensive literature on competitive interactions. Detailed data gathering in these sectors is hard, not only because of the multitude of local players, but also because key service dimensions are hard to quantify. Using empirical entry models, we show how to infer information on these sectors' degree of intra- and inter-channel competition from the observed entry decisions in different local markets. The approach also controls for relevant socio-demographic characteristics of the trading area that may affect performance. We apply the proposed empirical entry model to the video-rental market. Additional entries of video stores are found to significantly increase the level of intra-channel competition. Unlike the predictions of many normative economic models, we find this increase to be larger when the entry occurs in a duopoly than in a monopoly, a pattern consistent with recent experimental research on collusive behavior in oligopolies. We also find evidence of inter-channel cannibalization from the upstream channel (movie theatres), but not from the downstream channel (premium cable). Finally, various socio-demographic characteristics of the trading zone, such as income and household size, are found to also have a significant impact on store performance.Competition; Sector; Channel competition; Characteristics; Oligopoly; Monopoly;