The Theoretical Model

Market share is defined as the percentage of market commanded by a brand. Market, again, can be defined in terms of volume, dollar or units as the total of the category. This brings along two dimensions- time and space. So the market is always described in conjunction with a time (year, quarter, week) and a geography (Total United States market, New York market, all Albertsons stores etc.) and so the share.

The definition of category is a bit ambiguous as products are, always, not well defined in their uses. For example, soups can be considered as a snack or as a main meal and depending upon that the competitive set and substitutability will change. This will lead to confusion around defining and measuring the category and its size. Nonetheless, to carry out a particular analysis, well always need to define this in specific terms. What we can infer is, the more defined the product attributes are, the better defined and closed the category is. For example, the use and substitutability of cigarettes are limited so the category is very well defined. In this analysis, well depend upon prior industry knowledge and experience while defining the category. The literature, though, talks about some quantitative measures for the same (Nakanishi and Cooper, 1988; presents a brief survey).

We approach the descriptive analysis of drivers of market share as effects of pricing and promotional strategies of the brands. So the most suitable data would be the point of sale data which carries information about the promotional conditions and pricing in-store. Also, IRI store week data gives us the geographical and retailer level dispersions so the framework gets exposures to various states of affairs. It provides similar data for the competitors so interactions are easier to be modeled for.

A numeric definition of market share, in the light of the above, is,

S it = Vit / Vit

i = 1, . n

(1)

Market or category is strictly defined here by n brands.

Volume (or units or dollars) of brand i at period t is denoted by Vit So the share of brand i at period t is therefore S it To build a descriptive model, we start with Kotlers fundamental theorem of market share (KFT) as share of brand i at time t is a function of its marketing efforts, relative to its competitors, effective at time t (Mit) (Nakanishi and Cooper 1988). However, it can be modified to cater for differential effectiveness of marketing efforts by different brands. In any case, it restricts the origin of the shares inside the gamut of marketing mix instruments. The knowledge of the market share is, then, becomes contingent upon that of the measurement of marketing efforts of a brand as a function of its marketing mix. A formal representation would be:

M it = f ( X 1t , X 2t , , X n t ).

. (2)

M it , the effectiveness of marketing strategy of brand i at period t is a function of a set of marketing mix strategies adopted by each brand operational at that time (Xit).
Xit may contain pricing and promotional strategy information, denoted quantitatively, of brand i adopted at t. Attraction theory, as described b y Bell, Keeney and Little (1975), takes further the definition of market share by incorporating the consumers dimension in the system. While choosing a brand from the available set, a consumer feels attracted towards each of the brands and she chooses the one with the highest attraction to her. So, added over all consumers, the share of a brand is the ratio of its attraction to the total of all brands. The attraction is generated not only by the market mix variables of the brands but also from the taste and preferences across consumers. Thus it breaks the ground for incorporating the knowledge of consumers perceptions about the brands in the framework.

Since attractions are not directly observable, we approximate it by observing the elements contributing to it (the marketing mix instruments of different brands) and by proposing logical interactions between them so that the results become meaningful. The attractions

such derived are conceived to be direct measures of the shares for each brand. However, attractions can run in a scale of infinity (real number scale) but we measure them in relative terms (one brands attraction vis--vis others) and the proportional attractions are assumed to represent shares.

To focus on measuring the attraction of each brand, we propose certain axioms: i. ii. Ai > 0 Ai = Aj Ai = 1 => if attraction is zero, the brand wouldnt exist => Si= Sj if attractions are equal between two brands, both will => sum of attractions of all brands equal to one. So the

enjoy the same share iii.

attractions here are relative to each other. This closes the system by realistically assuming that the attractions and so the shares sum up to one. iv. While choosing a brand, we assume that the other brands are also available to the consumer- so she is taking (theoretically) a fully informed decision with known attractions of each brand. Given this set up, well postulate a logical function to imitate the system. The nature of the function should be positive monotonic. That is, if a favorable variable increases, its share will go up and vice-versa. The nature of the affecting variables follows standard behavioral assumptions like if own price increases, share falls but opposite with competitor prices. Again if one brand increases promotions, share should increase etc.

A mathematical formulation inheriting the said properties would be:

Ai

k ,i , j

X ki j

kij

.. (3)

Where Ai are the attractions (and measurement of shares) of ith brand and Xkji is the kth variable of brand j affecting brand i. K denotes the particular variable (measurement of price reduction, features, display etc.). If j = i then its the own action, otherwise its a cross action. This formulation depicts a competitive framework where the brands actions are allowed to interact with and influence others; formally known as the Multiplicative Competitive Interaction (MCI) model (Nakanishi and Cooper 1988).

Quantities of Interest: Share Elasticities

The purpose of the model is to derive quantitatively the effect of a marketing action on a brands share. Or how a brands share changes when the price of the same or any other brand changes. A useful tool is elasticities which depicts the percent of change in the brands share due to one percent change in any affecting variable. Mathematically,

es i jk (si / si ) /(xkj / xkj )

(4)

We read the left hand side as share elasticity (es) of brand i with respect to change in kth variable of brand j. If j = i then itd be an own elasticity, otherwise cross. These quantities are the estimable parameters (s) in our model

Expected nature of the elasticities: i. If an action is conducive to a brands share, the elasticity should have a positive direction. For example, if price of a competitor increases or promotion of the own brand increases elasticity would be positive. ii. The effects of marketing instruments on a share dont chan ge in short terms so we expect the elasticities to be constant in the short run.

Our MCI formulation and elasticities thereof complies with these features.

Derivation of the Basic Model The said properties can be translated into an equation in the our data premises as follows:
Ai .i BP1B1i * PI 1I 1i * BP 2 B 2i * PI 2 I 2i * ... * BPn Bni * Pn Ini

. (5)

Where, i=1,,n

(the brands)

Ai = attraction (or proxy of share) of brand i i = intercept of brand i BP = base price PI = Price index (actual price/ base price) Bji = coefficient of Base price of j affecting i share elasticity Iji = coefficient of Base price of j affecting i share elasticity Weve used only price related variables like the base price (BP) and promoted price index (PI) to develop the system. However, other promo variables can also be similarly introduced. Promoted price index, a measurement of discount, can be seen as a measure of promotion.

In this multiplicative form, the elasticities are directly represented here as the coefficients.

As the shares of each equation is related to each other with the binding condition of all summing up to one, we need all the brands share equation be represented here with the adding up condition to complete the system.

So the complete system would be:

A1 .i BP1B11 * PI 1I 11 * BP 2 B 21 * PI 2 211 * ... * BPn Bn1 * Pn In1

A2 .i BP1B12 * PI 1I 12 * BP 2 B 22 * PI 2 212 * ... * BPn Bn 2 * Pn In 2

... ... ...

An n BP1B1n * PI 1I 1n * BP 2 B 2n * PI 2 21n * ... * BPn Bnn * Pn Inn

and Ai = 1 Our task would be to solve for this system. . (6)

The Estimable Model

Clearly, this is a system of equations as opposed to single equation estimation. This involves a number of technical concerns which can be overcome by advanced statistical procedures. With the higher computing resources like SAS we propose to estimate the whole system.

In the first step, we log linearize each brand equations as follows so that the system become linearly estimable.
log Ai log i B1 _ i * LBP1 I1 _ i * LPI1 B 2 _ i * LBP 2

I 2 _ i * LPI 2 ...... Bn _ i * LBPn In _ i * LPIn

.. (7) (for all i = 1,2, , n)

Ai = 1 This system is the structural system of the framework.

Now this system has n + 1 equations where the last equation is the adding up constraint. This is a deterministic equation as opposed to the other probabilistic brand equations and one need not estimate this. So we have n unknowns with n + 1 equations rendering the system to be over-deterministic. To reduce the number of equation to n, we subtract the nth equation from each of the brand equations as follows. This is analogous to dividing each equation by the nth equation in the multiplicative form of system 6. That means, we are representing each equation as relative to the nth equation. Brodie and de Kluyver (1984), Fok, Frances and Paap (2002) have shown that the estimates are independent of choice of the brand equation to be subtracted. For sake of simplicity, weve chosen nth brand to describe the system. The subtracted equations are called the reduced form of the system. Well estimate this system and from here the structural coefficients will be calculated. It can be shown that in such a system all the structural coefficients are identified, avoiding the identification problem typical to system of equation estimation.

The relation between the structural and reduced form coefficients are:
log Ai log An (log i log ) LBP1( B1 _ i B1 _ n) LPI1( I1 _ i I1 _ n) LBP 2( B2 _ i B 2 _ n) LPI 2( I 2 _ i I 2 _ n) ...... LBPn ( Bn _ i Bn _ n) LPIn( In _ i In _ n)

Or,
R log Ai R log i RB1 _ i * LBP1 RI1 _ i * LPI1 RB 2 _ i * LBP 2 RI 2 _ i * LPI 2 ...... RBn _ i * LBPn RIn _ i * LPIn

.. (8) (for all i = 1,2, , n-1) Ai = 1 Where R stands for the reduced forms. Closing the system Introduction of Homogeneity and Adding up Conditions

Consider a case where the brands are more promotion-driven than of being more loyaltydriven; a case of (near) perfect competition. Here we assume that consumers are attracted towards a brand due to each of the marketing instruments (say price) by observing its relative position in the market and not by absolute magnitude. In simple words, consumers are attracted towards a brand by seeing its relative price vis--vis others. Therefore, if all the brands increases (or decreases) by their price in the same proportion, the attraction vector of the brands and thus the share vector do not alter. To ensure this in estimation, our estimable system should exhibit a zero degree of homogeneity (see appendix A).

For example, let all the brands increase their actual price by the same proportion. It can be shown that everything else unaltered, homogeneity of degree zero is achieved if and only if the sum of coefficients for each brand individually equals to zero. Therefore, the homogeneity restrictions would be

B1 _ i I1 _ i B2 _ i I 2 _ i .... Bn _ i In _ i 0 (for all i = 1,2, , n)

(9)

However, this is a restrictive assumption which may defy existence of market leaders whose shares are more brand-equity driven. Wed propose to use this restriction as special cases rather than a universal one.

For all i and all marketing variables Adding up constraint is achieved by setting sum of intercepts to 1 as follows:

1 2 3... n 1
That is, the mean shares sum up to one.

.(10)

Identifying structural parameters from the reduced form estimators 1. Identifying coefficients for the base brand:

With some arithmetic manipulation, it can be shown that on the average case,

B1 _ n B1 _ 1* S1 B1 _ 2 * S 2 ... B1 _ 2 * S n1 (11)
Where S i are the observed mean shares of each brand. We can copy the approach for all other parameters of this brand.

Thus we identify the structural forms of each of the parameters of the base brand.

2. Identifying coefficients for the other brands: From there we can easily calculate back the structural coefficients of all the other brands with the following identity:
RB1 _ 1 B1 _ 1 B1 _ n etc.

.. (12)

3. Solving for the intercepts: The reduced form intercepts are defined as
R log i log i log n

Or,

i exp( R log i log n )

(13)

Now,

=1

Therefore,

exp( R log
1

n 1

log n ) exp(log n ) 1

From there it can be shown that

n 1 /(1 exp( R log i ) 1

i

n 1

Once the intercept value for the base brand is known, we can estimate the intercepts for the other brands using above equalities (13).

4. Solving for the dependent variables:

In a similar fashion, given the estimated reduced form shares (or logarithm of it), we can estimate back the structural forms.
R log Ai log Ai log An

Or,

Ai exp( R log Ai log An ) .. (14)

Now,

Ai = 1

Therefore, Or,

exp( R log A log A ) exp(log A ) 1

i n n 1 n 1 i

n 1

An 1 /(1 exp( R log Ai ) 1

Once we know the estimated value of brands using the identity (14). 5.

An

, we can calculate back estimated shares of other