Modeling Competitive Marketing Strategies: The Impact of Marketing-Mix Relationships and Industry Structure

Abstract

This paper empirically analyzes the formulation of competitive marketing strategies consisting of product quality levels, promotional expenditures and prices. Using a simultaneous-equation model, we examine the use of prices and promotional spending as signals or indications of product quality, the impact of promotional spending on prices, and the impact of industry structure on the formulation of the complete marketing mix. The structural equations are developed using a theoretical model of optimal competitive marketing mix, and are estimated using business-level PIMS data, which consists largely of industrial, durable goods producers. For a cross-section of 1,100 of these businesses, three results of the estimation are especially interesting: • Price-cost margins are high for high quality products, suggesting that high prices indicate or signal high quality. • Promotional intensity is unrelated to product quality, suggesting that promotional effort provides no reliable signals of quality. Intensely promoted products earn low price-cost margins, however, indicating that promotional spending is associated with high price sensitivity. • Quality levels, promotional intensity, and price-cost margins vary significantly with competitive and market conditions such as the concentration of competitors and the stability of market shares, although these relationships are generally weaker than relationships between quality, promotion, and price-cost margins. Quality levels are high and margins low in markets with unstable shares or unconcentrated competitors.