Time Varying Competition

27 Pages Posted: 24 Jun 2004

See all articles by K. Sudhir

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Pradeep K. Chintagunta

University of Chicago

Vrinda Kadiyali

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 2004

Abstract

Normative models typically suggest that prices rise in periods of high demand and cost. Yet in many markets, prices fall when demand or costs rise. This inconsistency occurs because the normative models assume that competitive intensity does not change with demand and cost conditions over time. We therefore introduce the notion of time varying competition by suggesting that it is important to not account for the direct effect of demand and cost on prices (e.g., higher demand means higher prices), but also the indirect effect of demand and cost changes on competition (e.g., higher demand could cause more competition and hence lower prices).

We develop a general, unified framework to empirically model the direct and indirect effects of demand and cost shifts on pricing in differentiated product markets. Our approach allows us to measure the indirect effect of multiple demand and cost drivers on competitive intensity and test predictions from alternative theories of repeated games. The empirical application is to the U.S. photographic film industry where there are two main players, Kodak and Fuji.

We find that the indirect effects are highly significant and comparable in magnitude to the direct effects. Competitive intensity is greater in periods of high demand and lower cost and is moderated by whether demand or costs are expected to grow or decline. Interestingly, we find asymmetries in the competitive responses of Kodak and Fuji. While Kodak is sensitive to demand factors, Fuji is sensitive to costs. Our results suggest that market characteristics such as observability of competitor prices can be an important determinant of how competitive intensity is affected by demand and cost conditions.

Keywords: Pricing Research, Competition, Competitive Strategy, Game Theory, Estimation and Other Statistical Techniques

JEL Classification: C33, C50, D43

Suggested Citation

Sudhir, K. and Chintagunta, Pradeep K. and Kadiyali, Vrinda, Time Varying Competition (March 2004). Available at SSRN: https://ssrn.com/abstract=558261 or http://dx.doi.org/10.2139/ssrn.558261

K. Sudhir (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Vrinda Kadiyali

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-1985 (Phone)
607-254-4590 (Fax)

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