The Impact of a New Competitive Entry on an Incumbent's Customer Base: Structural Changes versus Dynamic Effects

• Activity Number: 175
• Type: Invited
• Date/Time: Monday, August 8, 2005 : 2:00 PM to 3:50 PM
• Sponsor: Section on Statistics and Marketing
• Author(s): Wendy Moe*+ and Sha Yang and Tom Shively
• Companies: University of Maryland and New York University and The University of Texas at Austin
• Keywords: hierarchical Bayes ; competitive entry ; non-stationarity ; dynamic models ; consumer search ; customer base analysis

Abstract

In this paper, we study how the introduction of a new competitive entrant affects the customer bases of existing competitors. We model customer search behavior and changes in this behavior during a period when a formidable new product is launched. The model identifies multiple sources of nonstationarity. One source is the structural change in the market associated with a new entrant. These one-time shocks to the market may result in a permanent change in a consumer's latent quality perception for a target alternative and/or a change in the cost-benefit tradeoff of search, affecting how much and what the consumer searches. A second source of nonstationarity is period-to-period dynamics. While a structural change is taking place, gradual changes---perhaps resulting from learning or other evolutionary dynamics---also exist. The model presented here will separate these dynamics from structural effects. An additional challenge with this modeling problem is our ability to determine when the structural change affects consumers. Not all consumers are instantaneously aware of the new option when it is launched. We address this by modeling awareness as a consumer-specific latent variable.