25 Pages Posted: 21 Jul 2005
Date Written: June 2005
Competitive behavior between players in a mature market can have a different structure than those in growing markets. Pricing component of the marketing mix is less relied upon to expand market share in growing markets, while there is a greater reliance upon product differentiation and building stronger brand equity. On the other hand, in mature markets, there is usually very little scope for product differentiation, so there is a greater reliance on pricing for competitive gains. Since market share expansion in a mature market comes directly from competitive sales declines, pricing strategy changes in one brand leads to a fairly instantaneous reaction from other brands in the category and retail prices in general reflect the equilibrium condition of consumption.
This paper applies methods from Time Series Econometrics to identify nonstationary behavior and long-run equilibrium of retail prices of brands in mature and evolving markets. The results indicate that long-run equilibrium in prices may be an outcome of the maturity of markets, as the persistence of the shocks in the prices do not result in the persistence in shocks to sales. The cointegrating condition created by the intense price competition imposes a stationarity restriction on sales, hence eliminating the possibility of any long term pricing strategy and pricing becomes tactical.
Keywords: Price, Competition, Cointegration, Nonstationary, Error Correction
JEL Classification: C22, C1
Suggested Citation: Suggested Citation
Joseph, Joy V., Competitive Pricing Analysis in Mature & Evolving Markets: A Time Series Approach (June 2005). Available at SSRN: https://ssrn.com/abstract=758507 or http://dx.doi.org/10.2139/ssrn.758507