Competitive reaction versus consumer response: Do managers overreact?

Abstract

We study the relationship between competitive reaction elasticities and cross- and own-market share elasticities. Prescriptions derived from economic theory indicate that the product of the reaction elasticity and the own market share elasticity equals the cross market share elasticity, if managers aim to maintain their brands' market shares. We develop a framework that consists of all possible combinations of (dichotomized) cross market share-, competitive reaction- and own-market share effects. This framework can be used by managers as a decision-making tool. We argue that managers should react to changes in marketing activities for other brands only if those changes have nonzero effects on their own brands' market shares. We show that managerial practice deviates from these normative implications, resulting in under- and overreaction effects to competitors' marketing activities. Our empirical results suggest that overreaction effects occur more frequently than underreaction effects.