Consumer goods manufacturers usually sell their brands to consumers through common independent retailers. Theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer-retailer interaction (Vertical Strategic Interaction). Research in Empirical Industrial Organization has focused on analyzing the competitive interactions between manufacturers (Horizontal Strategic Interaction). Decision support systems have made various assumptions about retailer-pricing rules (e.g., constant markup, category-profit-maximization). The appropriateness of such assumptions about strategic behavior for any specific market, however, is an empirical question. This paper therefore empirically infers (1) the Vertical Strategic Interaction (VSI) between manufacturers and retailer, (2) the Horizontal Strategic Interaction (HSI) between manufacturers simultaneously with the VSI, and (3) the pricing rule used by a retailer. The approach is particularly appealing because it can be used with widely available scanner data, where there is no information on wholesale prices. Researchers usually have no access to wholesale prices. Even manufacturers, who have access to their own wholesale prices, usually have limited information on competitors' wholesale prices. In the absence of wholesale prices, we derive formulae for wholesale prices using game-theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer-pricing rules. We then embed the formulae for wholesale prices into the estimation equations. While our empirical illustration is using scanner data without wholesale prices, the model itself can be applied when wholesale prices are available. Early research on the inference of HSI among manufacturers in setting wholesale prices using scanner data (e.g., Kadiyali et al. 1996, 1999) made the simplifying assumption that retailers charge a constant margin. This assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers. In this paper, we show that this model is econometrically identical to a model that measures retail-price coordination across brands. Hence, the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing (category management) done by the retailer. We find empirical support for this argument. This highlights the need to properly model and infer VSI simultaneously to accurately estimate the HSI when using data at the retail level. Functional forms of demand have been evaluated in terms of the fit of the model to sales data. But recent theoretical research on channels (Lee and Staelin 1997, Tyagi 1999) has shown that the functional form has serious implications for strategic behavior such as retail passthrough. While the logit and linear model implies equilibrium passthrough of less than 100% (Lee and Staelin call this Vertical Strategic Substitute (VSS)), the multiplicative model implies optimal passthrough of ...

In a competitive marketplace, the effectiveness of any element of the marketing mix is determined not only by its absolute value, but also by its relative value with respect to the competition. For example, the effectiveness of a price cut in increasing demand is critically related to competitors' reaction to the price change. Managers therefore need to know the nature of competitive interactions among firms. In this paper, we take a theory-driven empirical approach to gain a deeper understanding of the competitive pricing behavior in the U.S. auto market. The ability-motivation paradigm posits that a firm needs both the ability and the motivation to succeed in implementing a strategy (Boulding and Staelin 1995). We use arguments from the game-theoretic literature to understand firm motivation and abilities in different segments of the auto market. We then combine these insights from the game-theoretic literature and the ability-motivation paradigm to develop hypotheses about competition in different segments of the U.S. auto market. To test our hypotheses of competitive behavior, we estimate a structural model that disentangles the competition effect from the demand and cost effects on prices. The theory of repeated games predicts that firms with a long-run profitability objective will try to sustain cooperative pricing behavior as a stable equilibrium when conditions permit. For example, markets with high concentration and stable market environments are favorable for sustaining cooperative behavior and therefore provide firms with the to cooperate. The theory of switching costs suggests that in markets in which a firm's current customers tend to be loyal, firms have a to compete very aggressively for new customers, recognizing the positive benefits of loyalty from the customer base in the long run. As consumer loyalty in the market increases, the gains from increasing market share by means of aggressive competitive behavior are more than offset by losses in profit margins. Firms therefore have the to price cooperatively. Empirically, we find aggressive behavior in the minicom-pact and subcompact segments, cooperative behavior in the compact and midsize segments, and Bertrand behavior in the full-size segment. These findings are consistent with our theory-based hypotheses about competition in different segments. In estimating a structural model of the auto market, we address several methodological issues. A particular difficulty is the large number of car models in the U.S. auto market. Existing studies have inferred competitive behavior only in markets with two to four products. They also use relatively simple functional forms of demand to facilitate easy estimation. Functional forms of demand, however, impose structure on cross-elasticities between products. Such structure, when inappropriate, can bias the estimates of competitive interaction. We therefore use the random coefficients logit demand model to allow flexibility in cross-elasticities. We also use recent advances in New Empirical Industrial Organizat...

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Rao, and the anonymous JMR reviewers for their many constructive comments. They also thank the participants at the 2006 American Marketing Association Doctoral Consortium at the University of Connecticut and the 2008 University of Texas at Dallas Marketing Conference for their helpful feedback. Russ Winer served as guest associate editor for this article.

This study attempts to answer a basic customer management dilemma facing firms: when should the firm use behavior-based pricing (BBP) to discriminate between its own and competitors' customers in a competitive market? If BBP is profitable, when should the firm offer a lower price to its own customers rather than to the competitor's customers? This analysis considers two features of customer behavior up to now ignored in BBP literature: heterogeneity in customer value and changing preference (i.e., customer preferences are correlated but not fixed over time). In a model where both consumers and competing firms are forward-looking, we identify conditions when it is optimal to reward the firm's own or competitor's customers and when BBP increases or decreases profits. To the best of our knowledge, we are the first to identify conditions in which (1) it is optimal to reward one's own customers under symmetric competition and (2) BBP can increase profits with fully strategic and forward-looking consumers.behavior-based pricing, customer heterogeneity, stochastic preferences, forward-looking customers, forward-looking firms, customer relationship management, competitive strategy, game theory