EMPIRICAL ANALYSIS OF COMPETITIVE PRICING STRATEGIES WITH COMPLEMENTARY PRODUCT LINES Yu Ma, Seethu

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EMPIRICAL ANALYSIS OF COMPETITIVE PRICING
STRATEGIES WITH COMPLEMENTARY PRODUCT LINES(Yu
Ma, Seethu Seetharaman, Chakravarthi Narasimhan)

• Seethu Seetharaman
• Jesse H. Jones Graduate School of Management
• Rice University
• May 2006

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Motivation

• Shopping basket is composed of multiple
  categories.
• Firms often sell products in multiple categories.
  
• General Mills
• Firms decisions account for purchase
  correlations across categories.
• Theoretical Prediction Cabral and Villas-Boas
  (2002)

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Research Objectives

• Model shopping basket purchases.
• Demonstrate the strength of cross category
  complementarity.
• Infer manufacturers and retailers competitive
  strategies.
• Analyze profit implications of different pricing
  strategies.

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Prior Literature
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Two-Category Model
Brand Utility
Price
Income
Complementarity
Demand Shock
Joint Purchase
Single-Category Purchase
Random Error
No Purchase
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Interpretation

• defines cross-category relationship.
• Cross price derivative
• Define complementarity/substitutability.

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Supply Side Channel

• 3 major manufacturers.
• Umbrella branding.

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Supply-Side Model Retailer

• Retailers objective

Wholesale Price
Retail Cost
Market Share
Market Size
Max Brand Level Profit
Max Category Profit
Max Joint Profit
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Supply-Side Model Manufacturers

• Manufacturers objective

Market Size
Wholesale Price
Manufacturing cost
Market Share
Compete in One Category
Compete in Both Categories
Collude
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Supply Side Hypotheses
Compete in One Category
Compete in Both Categories
Collude
Manufacturer
Vertical Nash
M-Stackelberg
Vertical Interaction
Max Brand Level Profit
Max Category Profit
Max Joint Profit
Retailer
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Data Market Structure

• 1998-1999.

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Data Panel

• 200 Households, 22,317 store visits.
• Purchase incidences
• HH types

Buy Cake Mix Only 44
Buy Frosting Only 1
Buy Both 155
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Joint Purchase Pattern

• Conditional on joint purchases.

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Demand Model Results

• Model fit
• 2 consumer segments.

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Consumer Segment
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Complementarity Estimates

• Willingness to pay

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Graphic Interpretation
WTP for Complementarity
WTP for Frosting
WTP for Cake Mix
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Observations

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Complementarity Estimates

• Willingness to pay

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Inference for Supply Side
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Empirical Analysis of Competitive Strategies

• Joint Max produces good equilibrium.

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Conclusions

• Conclusions
• Consumers prefer complementary products from the
  same manufacturer.
• Manufacturers avoid direct competition.
• Coordinating prices across categories is a
  profitable strategy.
• Future research.
• Test with more categories.
• Consider complementarity as a decision variable.