Economic modeling reveals optimal defensive pricing and spending adjustments for incumbent firms, indicating unavoidable profit declines following competitor entry.
Key Points
Determine how an incumbent firm should adjust marketing expenditures, distribution budgets, and pricing to optimally defend its market share against a competitive new product entry.
Formulated an analytical microeconomic model representing products within a multiattribute perceptual space with heterogeneous, utility-maximizing consumers.
Modeled awareness advertising and distribution expenditures through nonlinear response functions under profit-maximization objectives.
Derived estimation procedures to infer consumer taste distributions and competitor product positions using empirical sales, awareness, and availability data.
Optimal defense generally requires reducing awareness advertising and cutting distribution budgets unless entry can be completely deterred, alongside a potential price increase.
Under uniformly distributed consumer tastes, price cuts improve defensive profits, and marginal improvements in product quality and advertising repositioning should focus toward the defending brand's core strengths.
Overall firm profits decrease following competitive entry even when executing the fully optimized defensive strategy.