An accurate
understanding of the structure of competition is important in
the formulation of many marketing strategies. For example, in
new product launch, product reformulation, or positioning decisions,
the strategist wants to know which of his competitors will be
most affected and hence most likely to respond. Many marketing
science models have been proposed to identify market structure.
In this
paper we examine the managerial problem and propose a criterion
by which to judge an identified market structure. Basically,
our criterion is a quantification of the intuitive managerial
criterion that a "submarket" is a useful conceptualization if
it identifies which products are most likely to be affected
by "our" marketing strategies. We formalize this criterion within
the structure of classical hypothesis testing so that a marketing
scientist can use statistical statements to evaluate a market
structure identified by: (1) behavioral hypotheses, (2) managerial
intuition, or (3) market structure identification algorithms.
Mathematically,
our criterion is based on probabilities of switching to products
in the situation where an individual's most preferred product
is not available. "Submarkets" are said to exist when consumers
are statistically more likely to buy again in that "submarket"
than would be predicted based on an aggregate "constant ratio"
model. For example, product attributes (e.g., brand, form, size),
use situations (e.g., coffee in the morning versus coffee at
dinner), and user characteristics (e.g., heavy versus light
users) are specified as hypotheses for testing alternate competitive
structures.
Measurement
and estimation procedures are described and a convergent approach
is illustrated. An application of the methodology to the coffee
market is presented and managerial implications of six other
applications are described briefly.
