How Dynamic Consumer Response, Dynamic Competitor Response and Expanded Company Action Shape Longterm Marketing Effectiveness

Abstract

Long-term marketing effectiveness is a high priority research topic for managers (Marketing Science Institute 2002), and recent research applied flexible models of dynamic market interactions to measure the net long-term performance impact of marketing actions. Unfortunately, this net long-term impact is challenging to interpret, as it emerges from the complex interplay among dynamic reactions of several market players. This paper introduces and formally compares restricted policy simulations in order to distinguish three dynamic forces: consumer response, competitor response and expanded company action. Two rich marketing datasets allow the analysis of retail price, wholesale price, display, feature, advertising and product line extensions.

The first finding is that dynamic consumer response significantly differs from the net longterm impact and largely follows marketing theory predictions. Second, expanded company action is a main contributor to net long-term marketing effectiveness in both datasets. For tactical actions, such as price and feature changes, it takes the form of inertia (prolonged company action), as promotions continue for several weeks due to both manufacturer and retailer decisions. For strategic actions, such as advertising and product line extensions, cross-marketing support (integrated company action) adds strongly to dynamic consumer response. Finally, competitor response reduces the net long-term impact in one application, but not in the other. As a result, managers are urged to look beyond dynamic consumer and competitor response and to evaluate their company's and retailer's decision rules for expanded marketing actions when assessing long-term marketing effectiveness.

Keywords: Long-term Marketing Effectiveness, Dynamic Consumer, Company and Competitor Response, Vector Auto Regressive (VAR) Models, Impulse Response Functions, Policy Simulation Restrictions