Competitive Reactions and the Cross-Sales Effects of Advertising and Promotion

55 Pages Posted: 20 Feb 2003

See all articles by Jan‐Benedict EM Steenkamp

Jan‐Benedict EM Steenkamp

University of North Carolina (UNC) at Chapel Hill - Marketing Area

Vincent R. Nijs

Northwestern University - Department of Marketing

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management

M. G. Dekimpe

Catholic University of Leuven (KUL) - Department of Applied Economics; Erasmus Research Institute of Management (ERIM)

Date Written: June 2002 3,

Abstract

How do competitors react to each other's price-promotion and advertising actions? How do these reactions influence the net sales impact we observe? We answer these questions by performing a large-scale empirical study of the short-run and long-run reactions to promotion and advertising shocks in over 400 consumer product categories, over a four-year time span. Competitive reaction can be passive, accommodating or retaliatory. We first develop a series of expectations on the type and intensity of reaction behavior, and on the moderators of this behavior. These expectations are assessed in two ways. First, vector-autoregressive models quantify the short-run and long-run effect of a promotion or advertising action on competitive sales and on competitive reactions. By cataloging the numerical results, we are able to formulate empirical generalizations of reaction behavior ("how do they react?"). Second, we estimate structural models of reaction intensity, in function of various market and competitive characteristics ("what are the drivers of reaction?"). Finally, by comparing our findings on reaction behavior with those on promotion and advertising effectiveness, we are able to evaluate competitive reaction behavior ("are they reacting as they should?"). A major finding is that competitive reaction is predominantly passive. When it is present, it is usually retaliatory in the same instrument, but accommodating or retaliatory in a different instrument. There are very few long-run consequences of any type of reaction behavior. We also report on several moderating effects that are in line with expectations, and that support the presence of a certain amount of rationality in competitive reaction behavior. The net impact of the over-time effects of advertising and price-promotion attacks, competitive reactions and the sales effectiveness of each, is that competitors' sales are generally not affected, and especially not in the long run. We weigh the evidence that this sales neutrality is "natural" (i.e., due to the nature of consumer response) versus "managed" (i.e., due to the vigilance and effectiveness of competitors), and conclude in favor of the former.

Keywords: competitive reactions, price promotions, advertising, impulse response functions

JEL Classification: M, M31, C44, M37

Suggested Citation

Steenkamp, Jan-Benedict E. M. and Nijs, Vincent R. and Hanssens, Dominique M and Dekimpe, Marnik, Competitive Reactions and the Cross-Sales Effects of Advertising and Promotion (June 2002 3,). ERIM Report Series Reference No. ERS-2002-20-MKT. Available at SSRN: https://ssrn.com/abstract=370969

Jan-Benedict E. M. Steenkamp

University of North Carolina (UNC) at Chapel Hill - Marketing Area ( email )

CB 3490
Chapel Hill, NC 27599
United States
919-962-9579 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/Faculty/search/detail.cfm?person_id=860

Vincent R. Nijs

Northwestern University - Department of Marketing ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4497 (Phone)
310-206-7422 (Fax)

HOME PAGE: http://www.anderson.ucla.edu/faculty/dominique.hanssens/

Marnik Dekimpe (Contact Author)

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 16 326 957 (Phone)
+32 16 326 732 (Fax)

HOME PAGE: http://www.econ.kuleuven.ac.be/tew/academic/market/members/MarnikDekimpe.htm

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1715/9576 (Phone)
+31 10 408 9011 (Fax)

HOME PAGE: http://web.eur.nl/fbk/dep/dep3/about/members/people/mdekimpe

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