Dynamics of Competition and its Effects on Profitability

Research Stay at Dartmouth College (SNF Scholarship)

Abstract:
Competitive dynamics in a market hamper marketing departments from being able to always maximize profitability. Nevertheless, understanding the market and competitive forces is crucial for deciding on market actions and predicting future reactions of competitors. The focus of this study is to analyze effects of market concentration and shifting modes of competition on market profitability. While the theoretical literature bearing on the effects of market structure and different modes of competition comes largely from economic and indus-trial organization research, much of the empirical research has been done in strategy and management literature. Hitherto marketing studies on competitive dynamics primary focused on detecting reactivity and interactions in the market rather than analyzing effects of competitive intensity on both customer profitability and market performance. Drawing on both man-agement and marketing literature, a conceptual framework will be developed which explains how companies can allocate resources. Based on this framework, it will be shown how to model time-varying competitive intensity and modes of competition in assessing the long-run impact of marketing decisions on market profitability and how to endogenize the concept in a vector autoregression approach with exogenous variables (VARX) along with structural break assumptions. Thus, the influence of upstream market concentration on long-term trends in sales, market share and marketing efforts can be examined. The proposed model captures the effects of price policy variations when modes of competition change over time and how the altering competitive environment affects sales and market share in the short- and in the long-run.