Competitive Positioning and Pricing of Brand Lines

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Competitive Positioning and Pricing of Brand Lines

• Dan Horsky
• Sanjog Misra
• Paul Nelson
• Simon School, University of Rochester

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Agenda

• Motivation
• Demand
• Cost
• Data
• Estimation Results
• Managerial Implications

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Motivation

• Positioning and managing brands is a central
  element of marketing organizations
• Many markets are composed of oligopolistic firms
  each having several brands and each maximizing
  joint profits over their brand line
• Firms, in positioning and pricing new or
  repositioned brands, need to take into account
  interrelationships in demand and cost
• Cannibalization on the demand side and economies
  of scope on the cost side
• An unaddressed issue
• Consumers evaluate products in a perceptual space
  while firms operate in a physical space

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Literature

• Papers that deal theoretically and empirically
  with some aspects of this problem have appeared
  in both marketing and economics.
• The relevant aspects are oligopoly, brand lines,
  individual level, aggregate level, perceptual
  attributes, objective attributes, prices, costs,
  competitive reactions, etc.
• Limitations of Past Works
• Economists work in the physical space, usually
  with aggregate data, and acknowledge problems
  (e.g. BLP mention that style type perceptual
  attributes are unobserved)
• Marketers often use individual data, work in the
  perceptual space (since the early 70s) and while
  they have addressed most demand/consumer side
  issues they lack on the supply/production side.

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This Paper

• Integrates the perceptual consumer with the
  physical firm by combining survey based
  individual data and market share data
• Demand side integrates individual level
  perceptions, preferences, choices, and market
  share, as well as objective attributes
• Cost side based on objective attributes
• Positioning and pricing based on brand line
  equilibrium in prices but not locations
• Also adds some new tweaks that simplify
  estimation while retaining consistency and
  efficiency.

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Data Sources

• Survey (Harris Interactive)
• Online Auto panel (bought SUV in last year)
• Around 300 final respondents
• Detailed data on preferences, ratings
• Market Share (Polk/Wards)
• National SUV market shares
• All SUVs by MSA
• All automobiles counts by MSA (outside good)
• Objective Attributes (Edmunds/Others)
• All relevant objective attributes
• Prices and Regional price adjustments
  (Wards/Edmunds)

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The Framework
Optimal positioning, repositioning and pricing
decisions
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Quality Function Deployment

• Consumers base decisions on subjective attributes
  not objective ones.
• Basic idea household production of subjective
  attributes from objective ones.
• QFD is the link between such objective and
  subjective attributes.
• Based on the ideas contained in the House of
  Quality literature.

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Off Road Ability Based On...
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Heterogeneous QFD Model

• Project Subjective (Z) onto Objective (X)
• Assuming normal errors and heterogeneity we can
  write the sample likelihood as
• With its simulated analog given by
• We use the estimation results to construct the
  posterior density of the ? and the predictive
  density for Z.

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Preferences Basic Model

• A given consumers (i) utility function for brand
  j is denoted as
• If we observe preference rankings for a set of
  the brands, the sample likelihood can be
  described by
• Where
• This gives us a predictive density for U.

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Computing Market Shares

• We observe shares and prices in various markets
  (MSAs). The prices in market t are
• the i are observed incidentals (destination fees,
  regional adjustments, license fees etc.)
• We allow for an adjustment and use
• This is similar to Horsky and Nelsons
  preference-choice updating idea

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Market Shares

• The market shares can be approximated using
• Where the utilities are draws from the
  appropriate posterior predictive density

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Estimating Costs Model

• We assume that a manufacturer maximizes profits
  over all its brands in all markets (t)
• Note that even though consumers face varied
  prices these differences do not enter the profit
  function directly (only via their impact on the
  relevant market shares)
• We assume that players are in a price equilibrium

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Estimating Costs Moments

• First order conditions give us
• Where the markup term is
• We now have all the pieces

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Estimation Approach

• Estimation is done in stages
• Step 1 Estimate QFD parameters
• Use Heterogeneous Linear Model to estimate QFD
  transformation densities
• Step 2 Estimate Demand parameters
• Step 2a Estimate subjective attribute parameters
  using heterogeneous rank-ordered (exploded) Logit
  on preferences
• Step 2b Use these estimates to simulate and
  update price effect via typical BLP contraction
  mapping /projection approach
• Step 3 Estimate Cost parameters
• Condition on demand side parameters and estimate
  cost parameters

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Parameter Estimates (QFD)
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Preference Model Estimates
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Market Share Estimates
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Cost Estimation Price Fit
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Cost Findings

• The average percentage markup was 22.7 (BLP
  23.9)

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Comparing to BLP (HP/RPM)
Bimodality has implications for brand line
management
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Comparing to BLP (City MPG)
Bimodality has implications for brand line
management
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Managerial Implications(Planned)

• The estimated demand and cost functions will be
  used to identify profit maximizing SUVs in
  physical space.
• We will also be able to ascertain optimal
  repositioning that take into account brand line
  considerations and competitive price reactions.
• For example
• Ford might consider introducing a new SUV. What
  are the optimal characteristics and prices if
  they use the Ford brand as opposed to an
  independent new brand?
• GM might be thinking of dropping a particular
  SUV. How will this impact GMs other brands and
  their competition?

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Summary

• Firms need periodically to adjust the positioning
  and pricing of their brand line
• The problem is that consumers lie in
  multi-dimensional perceptual space.
• Firms, however, can only create products in the
  physical space.
• This divide has implications for product design,
  brand line management, pricing and competition.
• This paper considers these very issues and offers
  a methodology for tackling such strategic
  decisions.