A Reflection on Analytical Work in Marketing: Three Points of Consensus

Abstract:     
People make a wide variety of choices as consumers, managers, employers, and regulators. Most of these choices are not made in a vacuum but rather in a context of strategic interactions that make individual payoffs interdependent across the decision makers. This payoff interdependence leads to intertwined individual incentives, necessitating analysis of the entire system before one can predict and understand individual behavior. Analyzing such a complex system requires a precise mathematical framework to develop intuition and qualify theoretical predictions. A commonly used analytical framework is non-cooperative game theory.

We present several general points on which the marketing literature rooted in the paradigm of game theory has reached a broad consensus. We also organize the literature according to three broad substantive areas: competition, information, and market rules. This paper is not an exhaustive review of the literature. Instead, we use several particular examples from each area to illustrate the more general points of consensus that characterize the discourse in the literature. The points of consensus we propose are as follows:

1) Equilibrium analysis within an analytical framework is necessary for testing and refining conventional wisdom about situations with strategic interactions. Equilibrium as a solution concept ensures stability of the system under study, and equilibrium behavior can depart sharply from simpler intuition that does not consider the feedback inherent in strategic interactions.

2) Theoretical predictions can be sensitive to details of the modeling assumptions, making general predictions elusive. A trade-off exists between the generality of modeling assumptions and the usefulness of the resulting insights in answering a concrete question in a specific institutional situation. Therefore, more general models are not necessarily “better,” and the appropriate compromise between generality and usefulness depends on the scope of the question. Further, understanding which details significantly affect a theory’s predictions can be informative in its own right.

3) A two-way road should exist between theory and empirics. In one direction, theory can inform data analysis. In the other direction, empirical analysis can inform the assumptions of the theory. Either way, we agree with Bass (1995, p. G12) that science is “a process of interaction between theory and data that leads to higher level explanations.”

Number of Pages in PDF File: 12

working papers series