brands have weaker elasticities than low share brands (Ghosh, Neslin, and Shoemaker 1983;
Bolton 1989; Danaher and Brodie 1999). Additional characteristics that have been found to
influence elasticities include promotional and advertising activity, stockpileability, average
purchase cycle, salesforce, distribution, and advertising copy (Ghosh, Neslin, and Shoemaker
1983; Litvack, Calantone, and Warshaw 1985; Bolton 1989; Gatignon 1993; Kaul and Wittink
1995; Narasimhan, Neslin, and Sen 1996; Bell, Chiang, and Padmanabhan 1999).
2.2 Competitor Response
There are two streams of competitor response research. The micro approach studies the nature of
competitive interactions in established markets using weekly or monthly data (e.g., Leeflang and
Wittink 1996; Putsis and Dhar 1998; Kadiyali et al. 1999). The macro approach focuses on the
response of incumbent firms to new entrants in the market (e.g., Robinson 1988; Gatignon et al.
1989; Ramaswamy, Gatignon, and Reibstein 1994; Shankar 1998). Both streams draw on the
economics, industrial organization, and/or strategy literature to identify three sets of factors that
influence competitor response: (a) market share elasticities, (b) structural factors, and (c) firmspecific
effects.
(a) Market Share Response Elasticities: Economic theory posits that competitor response to a
firm’s change in advertising and promotion is governed by cross-elasticities (how strongly the
competitor’s share is affected by the firm’s move) and self-elasticities (how easily the competitor
can recover lost share). For instance, Leeflang and Wittink (1996) show that competitors should
react more strongly to preserve their market shares if their cross-elasticities are high. Although
self- and cross-elasticities should determine whether a competitor reacts, the empirical literature
shows that it is more difficult to predict their effect on how the competitor will react. For
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instance, Gatignon, Anderson, and Helsen (1989), Putsis and Dhar (1998), and Shankar (1998)
show that firms compete more strongly with effective weapons, i.e., with variables for which
they have strong self-elasticities. However, Brodie, Bonfrer, and Cutler (1996) and Leeflang and
Wittink (1996) find that competitors often either over-react or under-react; Bell and Carpenter
(1992) show that competitor response is different depending upon the objectives sought; and
Putsis and Dhar (1998) note that responses to cooperative versus competitive moves can be very
different.
(b) Structural Factors: Industrial organization theory suggests that market structure influences
competitive interaction (Scherer and Ross 1990). Concentration of the market, market share
position, and multi-market contact of competitors with the initiating firm have been identified as
key structural determinants of competitor response. As with elasticities, however, it is difficult to
predict the direction of their influence. For instance, some researchers believe that multi-market
contact increases competitive rivalry (Porter 1980), while others argue that it leads to mutual
forbearance and dampens rivalry because the competing firms have a high stake in many shared
markets (Bernheim and Whinston 1990; Shankar 1999). Dominant competitors are expected to
react differently from fringe firms, although it is not clear what the differences are (e.g., Spiller
and Favaro 1984; Putsis and Dhar 1998; Shankar 1999). Market concentration is expected to
increase cooperative behavior because monitoring is easier, signaling is more likely to be
perceived, and firms are less likely to compete away high margins (e.g., Qualls 1974; Scherer
and Ross 1990; Ramaswamy, Gatignon and Reibstein 1994).
(c) Firm-Specific Effects: The resource-based view conceptualizes the firm as a unique entity
with specific core competencies, leadership, culture, and resources that determine its actions
(Wernerfelt 1984; Barney 1991; Collis 1991; Chen 1996). Not surprisingly, the marketing
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literature focuses on identifying and measuring the marketing resources of firms, e.g., brand
equity, sales force, advertising and general marketing expertise, and market orientation (e.g.,
Capron and Hulland 1999). While market share position and marketing mix elasticities may be
imperfect surrogates for resources like brand equity and marketing expertise, other resources and
competencies are unobserved or difficult to measure and are accounted for through a firmspecific
effect (e.g., Boulding and Staelin 1993).
2.3 Conceptual Framework
Based on this literature, we have developed the framework in Figure 1 to answer our research
questions. The consumer response portion of this framework decomposes market share into three
components and considers the effects of own and competitive marketing mix on these
components. These effects are moderated by brand and category characteristics. The competitive
response portion posits that market share elasticities, structural factors, and firm-specific effects
determine competitor reaction. Finally, the net impact of a policy change by a brand comes both
directly, from consumer response to its own policy change, and indirectly, through competitors’
reactions to the policy change and consumers’ response to the competitors’ reactions.
(a) Decomposition of Market Share: Market share, the central focus of our study, is the product
of three components: penetration (PEN), share-of-category-requirements (SOR), and category
usage (USE). These three components correspond to brand switching, repeat purchasing, and
consumption effects, respectively, as the means by which advertising and promotion attract and
retain customers. PEN is the proportion of category users who purchase the brand at least once.
SOR is the proportion of the brand’s customers’ category purchases accounted for by the brand.
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USE is the average category purchase volume of the brand's customers compared to the average
category purchases of all households buying the category. Market share equals PEN times SOR
times USE.1 For example, P&G is purchased by 55% of all bar soap buyers. Buyers of P&G are
somewhat heavier users of bar soap. Their use of the category is 1.30 times that of the average
category user. Only 49% of their bar soap purchases are accounted for by P&G, so they are not
very loyal to P&G. Therefore, P&G's share in the bar soap category is 0.55 (PEN) times 1.30
(USE) times .49 (SOR), which is 0.3504, or 35.04% market share.
PEN is a measure of customer attraction because it reflects what proportion of category users are
attracted to the brand at least once. SOR is a measure of customer retention because it reflects
how much of the brand consumers buy once they have purchased it an initial time. SOR is used
as a measure of brand health, even loyalty, by practitioners (Hume 1992; Bhattacharya et al.
1996; Kristofferson and Lal 1996a, b). It reflects how well the brand retains its customers, and is
particularly relevant in the context of P&G’s value pricing strategy because one of the stated
goals of the strategy is to improve customer loyalty.