Unique inter-brand effects of price on brand choice

How do price changes by one brand affect the choice of competing brands? Such inter-brand effects may depend on the specific strategy followed by a firm. For example, a firm may target a particular brand to exploit its vulnerability or to avoid direct competition with other brands. Or a firm may design its pricing strategy aimed at reducing cannibalization of its own brands. Previous studies have utilized standard logit models to investigate inter-brand effects. However, these models impose constraints on price elasticities as a consequence of independence of irrelevant alternatives (IIA) assumptions. As a result, estimated own- and cross-elasticities reflect the restrictive assumptions of the model and may not provide an accurate description of the kinds of asymmetric competition among brands noted previously. Though existing market share models at the aggregate level do capture such competitive asymmetries, most disaggregate level logit choice models do not capture such asymmetries in a satisfactory manner. In this article a generalized logit (or mother logit) model is used to estimate unique interbrand response parameters to capture asymmetry. This methodology, drawn from the econometrics literature, overcomes the necessity of making a priori assumptions of competitive patterns and instead can be used to identify competitive patterns as they exist in the market place. In analyzing brand choice data from three product classes, IIA is violated in all three cases to varying degrees. The cross-price elasticities are used to draw managerial implications for brand and product line management.