Structural analysis of competitive behavior: New Empirical Industrial Organization methods in marketing

The impact of a firm's strategic marketing mix choices on profitability can be evaluated by understanding the impact of those choices on consumer dema nd for the firm's products and on the firm's costs. Additionally, a firm's strategic marketing mix choices, and its demand and costs can be affected b y rival firms' strategic choices. Therefore, to understand the effects of c hoice of marketing mix on profitability, we have to understand its effects on demand, cost and competitor reactions. The effects of choices of marketi ng mix on consumer demand have been analyzed in great depth in marketing, b ut research on the strategic reactions of competitors to such choices have been far more limited. The New Empirical Industrial Organization (NEIO) fra mework provides us with a source of methods that has potential to substanti ally add to our insights about competitive interactions among firms. In this paper, we first discuss a simple NEIO model to illustrate the basic methodology. We then discuss the contributions of this literature to our k nowledge of competitive marketing strategy. In the process, we discuss meth odological extensions of the basic model that are needed to model the insti tutional realities of specific markets. We also summarize how the existing literature has evolved, and provide our view of where the literature might profitably proceed from here. In particular, we discuss how future methodol ogical innovations in the dynamics of competition, discrete strategy choice , and asymmetric information estimation will enable wider application of th is methodology to competitive marketing strategy issues. The main advantage of NEIO studies is that they provide greater understanding of the competit ive behavior in specific markets or industries compared to cross-sectional studies across industries. Bountiful opportunities exist for additional stu dies that focus on similar phenomena in different markets to draw generaliz able conclusions from this Line of research. (C) 2001 Published by Elsevier Science B.V.