GREGORY S. CARPENTER and DONALD R.

LEHAAANN*

The authors develop a model of brand switching which incorporates marketing

mix variables, product features, and their interactions to examine patterns of brand
competition. Two forms of the model are presented and least squares estimation
procedures suggested. Implications of the models' parameters for analyzing the
structure of markets and patterns of brand competition are discussed. The models
are illustrated with an application using scanner panel data.

A Model of Marketing Mix, Brand Switching,

and Competition

Designing successful marketing strategies requires an
understanding of the structure of product markets and
patterns of competition within markets. Accordingly,
analysis of market structures and competition based on
brand choice and switching has received substantial at-
tention (e.g., see Fraser and Bradford 1983; Kalwani and
Morrison 1977; Lehmann 1972; Rao and Sabavala 1981;
Srivastava, Leone, and Shocker 1981; Rubinson, Van-
honacker, and Bass 1981; Urban, Johnson, and Hauser
1984). Such research identifies groups of competing
products based solely on product features. The impact
of other marketing mix elements such as price and ad-
vertising on brand choice, switching, and competition is
not considered. We develop a model of brand switching
which incorporates all elements of the marketing mix,
including product features, to analyze the structure of
product markets and patterns of competition within mar-
kets.
The model is developed by considering aggregate brand
switching as the movement of buyers from one product
to another based on relative prices, advertising, and util-
*Gregory S. Carpenter is Assistant Professor, Graduate School of
Management. Univesity of California, Los Angeles. Donald R. Leh-
mann is Professor, Graduate School of Business. Columbia Univer-
sity.
The authors are grateful to Lee Cooper, Barbara Kahn, Bob Meyer,
Wilfried Vanhonacker, Barton Weitz, and three anonymous JMR re-
viewers for comments; to Selling Area Marketing, Inc. for providing
data; to the UCLA Center for Managerial Economics and Public Pol-
icy Research and the Faculty Research Fund, Graduate School of
Business, Columbia University for partial financial support; and to
Charles Harper for computing and research assistance.
ity-yielding features of each alternative.' This concept is
formalized as a multinomial logit model which expresses
the conditional switching probability as a function of each
product's marketing mix, its features, and their inter-
action.
Our formulation provides an extremely flexible rep-
resentation of competitive market structures, in contrast
to methods which consider only product features and brand
choice or switching data (e.g., Kalwani and Morrison
1977) or only marketing mix elements such as advertis-
ing (e.g., Clarke 1973; Vanhonacker 1984). The mod-
el's parameters reveal groups of competing products based
on product features, and the impact of marketing mix
elements within and across the identified competitive
structure. These parameters show patterns of competi-
tion arising from any combination of product features,
marketing mix variables, and their interactions. This
flexibility affords insights unavailable from other tech-
niques. The model also captures dynamic elements of
the process which generates switching probabilities and
subsequent market shares. Representing these dynamics
gives additional insight into competition and suggests
potentially powerful strategic uses for the model beyond
those developed here.
The usefulness of the model is illustrated with an ap-
plication to an aggregate switching matrix generated ftom
UPC scanner data. Estimation of two versions of the niodel
reveals that prices and advertising in conjunction with
brand names and other product features are significant
determinants of brand switching and of competition in
'See McAlister (1982) for a discussion of individual-level buyer
dynamics.

318

Journal of Marketing Research

Vol. XXII (August 1985), 318-29
MARKETING MIX, BRAND SWITCHING, AND COMPETITION
the market studied. The patterns of competition vary
substantially, however, by brand and by product, indi-
cating individual product and brand competitive strengths
and weaknesses.
In the next section the multinomial logit model of brand
switching is developed. Estimation procedures then are
presented and the market structure implications of the
model's parameters are discussed. The empirical illus-
tration is followed by a discussion of future work and
potential managerial and strategic uses of the model.
A MULTINOMIAL LOGIT BRAND-SWITCHING
MODEL
In a market, the probability that one product^ is se-
lected from many, at a point in time, can be described
by the multinomial logit model. (For recent applications
of logit models to explain static choice over multiple al-
ternatives, see Gensch and Recker 1979; Guadagni and
Little 1983; Punj and Staelin 1978.) By adopting an al-
ternative interpretation, we can apply logit models to ex-
plain switching between products as well. Suppose, for
example, that individuals are grouped according to their
last purchase to form segments. The probability that a
segment selects a product now can be described by the
multinomial logit model where the probability of switch-
ing is essentially an aggregate conditional choice prob-
ability.'
More formally, consider segment i (composed of per-
sons who bought product i on the last purchase) facing
a set M of A^ products. Assume that for segment /, prod-
uct 7 e M yields utility Uy where utility is composed of
a deterministic component (v^) and a random component
(ey) so that
Uij = Vy + eij.
With the additional assumption that ey is distributed dou-
ble exponential (extreme value), the probability of
switching between elements of M is given by
(1) /, j e M.
kiM
Equation 1 has two interesting properties. First, it gives
the conditional switching probability as a ratio of the
utility of switching to product j relative to switching to
all products in the market set M. This approach is similar
to tiie bargain-value approach (Keon 1980) where buyers
make pairwise comparisons of their most recent pur-
'For clarity, product is used to mean an individual item sold in the
market and brand is used to indicate the name under which one or
more products are sold. Switching then refers to choices between
products. For example, in the soft drink market, a quantity of Diet
Coke would be a product with Coke being its brand.
'For previous work on modeling transition probabilities, see Leh-
mann and Carpenter (1982), MacLachan (1972), and Telser (1962).
Except for Lehmann and Carpenter (1982), these authors focus on
modeling transition probabilities to assess market response. Our focus
is on market structure and competitive analysis.
319
chase with all products in M. Second, it provdes an ag-
gregate representative of the dynamic process which
generates switching probabilities and subsequent market
shares. Static models of market share or aggregate brand
choice are unable to capture these dynamics even if aug-
mented with lagged dependent variables such as those
used by Guadagni and Little (1983). Static models with
lagged dependent variables essentially capture changes
in unconditional choice probabilities. In contrast, equa-
tion 1 models conditional choice or transition probabil-
ities. "*
In equation 1 Vy is the utility of switching to product
j from product i. As such, it depends on the attributes
and marketing activities of both products. To operation-
alize this notion, we express Vy as a function of two broad
classes of attributes of both products i and j , (1) mar-
keting control variables such as price and advertising and
(2) product features including brand name and other at-
tributes. These components may interact to affect overall
utility ratings for each product. For example, product
quality may alter the effectiveness of pricing and adver-
tising. (Such an interaction has been reported by Car-
penter 1983 who found price-quality and quality-pro-
motion relationships in durable and nondurable product
markets.)
More formally, the deterministic component of utility
is given by
(2) V,, = y
where:
C is a set of marketing mix or control variables,
F is a set of product features,
Xy^ is the value of alternative / relative to i on control
variable k,
Wyi, is the value ofj relative to i on product feature it,
and
a,vt, 3,t, and 7, are weights for thefc*control variable,
product feature, and interaction, respectively.'
*It is important to note that certain, specific formulations of equa-
tion 1 reduce to a model of marginal or unconditional choice proba-
bilities. If Vj, is a simple scalar transformation of v, and y,, where Vj
is the unconditional deterministic utility of product k, then equation
1 is equivalent to a model of unconditional probabilities. For example,
if v,j = (v, ; Vy), equation 1 reduces to
which is a logit model of the marginal choice probabilities. If Vj, is
not a simple sealer transformation of Vj and v,, as in equation 2 or 4,
equation 1 is a logit model of the transition rather than marginal prob-
abilities. See Theil (1969).
'Equation 2 can be expanded easily to include additional interac-
tions between marketing control variables and between product fea-
ture variables as well.
320 JOURNAL OF MARKETING RESEARCH, AUGUST 1985

More compactly, equation 2 is equation 7 can be rewritten as

(3) v,j = Z,.,.8, (, j t M
where: The system of equations implied by equation 8 is a
logically consistent system of seemingly unrelated equa-
Zjj is the vector of explanatory variables, including tions (Nakanishi and Cooper 1982). Ordinary least
marketing control variables and features for product squares estimates of 8, in equation 8 are unbiased but
j relative to / and may be inefficient depending on the structure of the co-
6, is the corresponding vector of weights. variance matrix of the errors of equation 8 and the de-
A more restrictive version of equation 3 constrains the gree of correlation among the columns of the data ma-
weights to be equal for all products. Under this alter- trix. (See Appendix for a more thorough discussion of
native restriction, equation 2 can be rewritten as estimation issues.)
Restricted Model
(4)
The restricted model is identical to equation 8 except
that the 8, are constrained to be equal for all i e M. In-
stead of a system of N equations, the model consists of
m iC m F
one equation with constant slopes; the different inter-
cepts remain to preserve logical consistency (Nakanishi
or more compactly equation 4 is and Cooper 1982). The regression model implied by this
(5) v,;. = Z,y8. /, y e M is a single-equation model.
In contrast to equation 3, equation 5 implies that all brands (9) log('iT,y) = |JL, + Z,-,8 I, 7 6 M.
are affected equally by relative values of the control Ordinary least squares estimates of 8 in equation 9 are
variables and product features; equation 5 is a special unbiased but potentially inefficient relative to coeffi-
case of equation 3 where all parameters are constrained cients produced by generalized least squares. (Again, see
to be equal. Appendix for a more thorough discussion of estimation
Both models can be expressed simply as issues.)

(6) I, 7 e M A Test of the Linear Restriction

where the restricted model constrains 8, = 8 for all / e M
and the unrestricted model imposes no parameter restric-
tions.
ESTIMATION BY LEAST SQUARES METHODS
Regression models for both the restricted and unre-
stricted versions of equation 6, derived using the results
of Nakanishi and Cooper (1982), are similar in form but
differ in the number of" equations constituting the model.
The unrestricted model requires one equation for each
product whereas the restricted model is simply one equa-
tion for all products.
Unrestricted Model
To develop the system of equations for the unre-
stricted model, recall that the unrestricted version of
equation 6 is
i, j e M
The model given in equation 9 is a special case of the
model in equation 8 with 8, = 8 for all i f. M. The va-
lidity of this constraint can be tested by the Chow test
for systems of seemingly unrelated equations (for ex-
ample, see Dhrymes 1978, p. 136). The Farley-Hinich
test for systems of equations can be applied to test the
equality of 8, over all pairs of products (see Carpenter
and Farley 1984).
MARKET STRUCTURE IMPLICATIONS
Parameters of models like equations 8 and 9 provide
insights into the structure of competition within a market
and the impact of marketing mix components within that
structure. Coefficients of the product feature variables
reveal groups of competitive products. Marketing mix
coefficients describe the effectiveness of products' mar-
keting policies in retaining or switching buyers, whereas
marketing mix/product feature interactions reveal how
marketing mix actions affect patterns of competition within
and across groups of competitors.

By taking logarithms of both sides we obtain

'In equation 8, the product-specific constants (i, ensure the logical
(7) - log consistency of the system; all predicted switching probabilities range
'. J from zero to one and sum to one. Alternatively, Zufryden (undated)
I suggests imposing an adding-up or normalization constraint on the
Because ji; = -log(2t ^ does not depend on y. estimated coefficients to ensure logical consistency in the system.
MARKETING MIX, BRAND SV\/ITCHING, AND COMPETITION
To illustrate how models like equations 8 and 9 can
provide such insights, consider a market where products
are composed of two attributes, brand name and form;^
price and advertising are the marketing control variables,
and switching is described by a specific form of equation
8.
(10) log(T7,,) = (JL, + 5,,, ADV,j + 82,.
+ 83, BRANDy + 84,,
+ 85,, (ADV.j BRANDy)
+ 86, (ADV.j FORM,,)
+ 87,, (PRICEij BRAND,y)
+ 88, (PRICEy FORM.j) + , ,i, jtM,
where:
ADVj, = (ADV,/ADVy) where ADV* is the adver-
tising of product k,
y = (PRICEi/PRICEy) where PRICE* is the
price of product it.
1 if / andy are the same brand name.
BRANDy =
0 otherwise,
1 if / andj are the same form,
0 otherwise,
e, is the residual, and
|x, is the constant.
Base Switching
In equation 10, the set of constants \i. = {^,,: / e M} is
the set of the logarithms of the mean conditional switch-
ing probabilities adjusted for the impact of price, ad-
vertising, brand name, form, and their interactions. For
a particular product, a large |x, indicates that the prob-
ability of losing a product i buyer to a competing product
is high. A small (ji, indicates great customer loyalty be-
cause the conditional probability of switching to another
product is low. The entire set |x provides information
about the relative strength of products, or the base level
of switching unattributable to price, advertising, product
features, and their interactions.
Advertising and Price Switching
Information about the ability of product i to retain
buyers through advertising and price alone is provided
by 8], and 82,. A significant negative 8,, indicates that,
through advertising, product i is able to reduce the prob-
ability of buyers switching to competitors. Similarly, a
significant positive 82, indicates that a high relative price
for product i encourages greater switching to competi-
'For example, in the soft drink market, Coca-Cola, Pepsi, and Diet
Rite are examples of brand names whereas flavors such as cola and
lemon-lime are examples of product forms.
321
tors' products. If 82, is large and positive, product i is
vulnerable to competitors who price aggressively (in-
creasing the relative price of product /). Similarly, a sig-
nificant negative 8,, indicates that product / can reduce
the impact of competitors' price reductions by increasing
advertising.
Product Feature Competition
Coefficients 83, and 84, provide information about the
structure of competing products based on brand name
and form. Positive 83, and 84, imply that buyers of prod-
uct i tend to switch between product / and products mar-
keted under the same brand name and form. This finding
would suggest the existence of groups of competing
products (so-called market partitions). Negative 83, and
84, imply that switching principally occurs between
products of different brand names and forms. This find-
ing would suggest the existence of variety-seeking, mul-
tiple users, or multiple uses. For an individual product,
a negative form coefficient may imply a competitive
strength; products of the same form are less likely to
draw buyers and thus there may be some competitive
insulation from physically similar products.
The model given by equation 10 can also capture any
mixture of brand- and form-based competition simulta-
neously. Suppose for instance that in our hypothetical
market one third of the products compete w i ^ products
of the same brand name, a second third with products
of the same form, and the remaining third with neither.
Products in the first category all would have a positive
83, parameter, the second third a positive 84,, and the
remaining third zero 83, and 84, parameters. Thus the
formulation given by equation 10 is versatile in the type
of information it produces about product feature com-
petition.
Marketing Mix/Product Feature Interactions
Advertising- and price-product feature interaction
coefficients 85,,, 8^,, 87,, and 88, indicate whether sub-
stantial switching occurs between products of the same
brand name and form on the basis of advertising and
price. Negative coefficients 85, and 86, indicate that
product i is able to reduce switching to products of the
same brand name and form by advertising. A positive
85, indicates that advertising for product / increases the
probability of switching to a product of the same brand
name, and that advertising for a single product strength-
ens the overall brand name attraction.
Similarly, positive price-brand name and price-form
coefficients 87, and 85, indicate that product i is able to
decrease switching to products of the same brand name
or form by pricing competitively. In this case, a large
positive 87, implies a strong brand name; when product
i buyers face high relative prices, they switch products
but remain loyal to the same brand name.
Insignificant marketing mix/product feature interac-
tions imply that switching due to pricing and advertising
levels does not vary by feature group.
322
Parameter Differences
Coefficient patterns in models like equation 10 can vary
by product in the market and over products over time.
Variations by product in a market at a point in time re-
veal that products are affected differently by competi-
tion, and that each has buyers who vary in sensitivity to
prices, advertising, product features, and their interac-
tions. Some products may have advantages in the form
of more effective marketing programs or greater insu-
lation ftx)m competitors. The relative import of each group
of parameters may vary over stages in the life cycle as
well. In new or emerging markets, extensive buyer
learning may occur so that competition is advertising-
driven. In growth markets, products may achieve dif-
ferentiation from competition so that stable, feature-based
groups of products emerge. Finally, in mature markets,
buying patterns may become more routinized and buyers
more price sensitive so that a combination of feature and
price competition may dominate.
EMPIRICAL ILLUSTRATION
We now apply the preceding models to analyze the
competitive structure of the market for a frequently pur-
chased consumer product. Though the models can be ap-
plied at the individual level, aggregate data are used for
this illustration.
Data. The market from which the data are drawn con-
sists of 20 products of a staple food typically distributed
through supermarkets, aggressively promoted at the lo-
cal and national levels, and sold under six brand names.
National advertising typically focuses on brand name
identification whereas local advertising (limited to news-
paper advertising) is price information/promotion ori-
ented.
Two types of products can be identified (referred to
here as type 1 and type 2 goods); within both types, five
different forms of goods are offered (referred to here as
form 1, form 2, etc.).* Brands restrict their offerings to
either type but offer multiple forms. The complete array
of products is outlined in Table 1. Item 6 did not appear
'For instance, in the soft drink market, caffeinated, caffeine-free,
diet, and nondiet are examples of product types whereas flavorings
are examples of product forms (see footnote 7).
Table 1
AAARKET OFFERINGS BY TYPE, BRAND, AND FORM"
Type J\ products
Form Brand A Brand B Brand C
1 3 1 17
2 4 8 18
3 5 9 19
4 6 10 20
5 11
'Entries are arbitrarily assigned product identification numbers.
JOURNAL OF AAARKETING RESEARCH, AUGUST 1985
as a switch and hence was dropped from the analysis,
leaving 19 products.
Data for each product cover a six-month period, are
drawn from a panel of more than 2000 individuals, and
were collected by a UPC scanner at the point of pur-
chase. One scanner record contains information on the
price paid for the particular item purchased; a second,
separately compiled record contains information about
local newspaper advertising including the length of time
a particular ad appeared and the newspaper in which it
was placed. (See Guadagni and Little 1983 for a more
detailed discussion of the advantages and limitations of
UPC scanner data.)
For each household, different products purchased con-
secutively on different days are considered switches. In
all, the data for the study represent 3428 product switches
of which 48% are repeat purchases. Even so, many of
the 361 cells contain few switches and thus provide lim-
ited information on some products with which to esti-
mate our models.
Conditional Switching Measure
The measure of conditional switching developed from
this data set and denoted Sjj is computed as follows. In-
dividual households are aggregated to construct an un-
conditional switching matrix, T; with the total share of
purchases for each product computed as
the conditional switching matrix is constructed with ii,ff'
element
s*j
*j = M.
The dependent variable in the regression analyses, de-
fined simply as the logarithms of the rows of the con-
ditional switching matrix, is denoted S.'
'Strictly speaking, this log-conditional switching variable is given
by
S = vec(iog S*)
where log S* denotes the matrix composed of the logarithm of the
elements of S* and vec(log S*) denotes the vector composed of the
rows of log S* transposed and stacked one on top of another.
Type 2 products
Brand D Brand E Brand F
12
15 1 13
16 2 14
AAARKETING MIX, BRAND SV\/ITCHING, AND COMPETITION 323

Marketing Control Variables Table 2

Two marketing control variables are defined, relative OLS PARAMETER ESTIAAATES FOR RESTRICTED MODEL
price and relative advertising.
Relative price of product j relative to i, Pij, is com- Parameter
puted as the ratio of the price of i to the price of 7 where Explanatory variables estimates T-statistics
Pi and pj are the average prices for products / and j over Item constants
the six-month period. 1 -3.76" -8.95
2 -4.09" -9.68
3 -4.47" -14.12
4 -4.47" -15.38
Relative advertising, denoted a^, is computed as the 5 -4.78" -14.89
ratio of a, to Oj where a, and aj are the total gross rating 7 -5.26" -14.96
8 -5.34" -16.81
points for local newspaper advertising over the six-month 9 -5.37" -16.56
period for products i andj. That is, a, is the number of 10 -5.33" -14.66
days an ad for i appeared multiplied by the average daily 11 -4.31" -13.52
circulation of the newspaper, summed over all ads; then 12 -3.29" -7.84
13 -3.48" -8.35
= (ajaj). i, j f. M. 14 -4.36" -10.35
15 -3.60" -11.11
Product Features 16 -3.28" -10.13
17 -4.09" -12.90
The three product features are brand name, type, and 18 -4.20" -13.28
form. All three product feature variables are identically 19 -4.67" -14.51
defined; namely 20 -4.99" -15.46
Marketing mix and product feature variables
1 if I and j are equal on feature k, k = \,2,3 Advertising .00 .74
0 otherwise i, j e M. Price -.01 -.04
Brand .51 .25
That is, relative product feature variables are defined to Form 1.62" 3.75
indicate similarity or dissimilarity on three dimensions. Type -1.45" -1.47
Marketing mix/product feature interactions
Regression Models Advertising-brand .00 -.80
Advertising-form -.0003" -2.69
Using these variable definitions, we can state the un- Advertising-type -.lE-5'' -1.49
restricted model of switching as Price-brand .19 .09
Price-form -.54" -1.35
(11) Sij = (A, + 8i,a,, + b2,iPij Price-type 2.31" 2.36
"Significant at .01 level.
"Significant at . 10 level.
R' = .96.

+ ,- i,jeM.
The restricted model is identical to equation 11 except
that all the slopes are constrained to be equal and all the
intercepts vary. Equation 11 therefore is a system of 19
equations whereas the restricted model is a single-equa-
tion model.
Restricted Model Results
Both OLS and (using a generalized inverse) GLS
estimates were computed. Because of substantial
multicollinearity and the singular covariance matrix,
GLS parameters showed mixed gains in efficiency
over OLS estimated parameters. Overall, the unbiased
OLS coefficients were more stable and hence are re-
ported in Table 2.
Base switching. Immediately evident is a consistently
significant base level of switching for all 19 products.
Differences in the observed item constants indicate dif-
ferences in the mean conditional switching probability
adjusted for prices, advertising, and product feature as
well as interactions among each of these factors as noted
before. In this sense, products 7, 8, 9, and 10 appear
strong because they lose relatively few customers by
chance; similarly, products 1, 12, and 13 are relatively
weak competitors because, other things equal, the prob-
ability of a customer switching to a competitor is greatest
for these products.
Advertising. In the market as a whole, local advertis-
ing does little to affect buyer movements between com-
peting products. Among products of similar form and
type, advertising slightly reduces the conditional switch-
ing probability, suggesting that advertising builds prod-
uct loyalty.
Pricing. The impact of price levels is negligible at the
aggregate level. Price competition is limited principally
to products of similar type and form. Among products
of the same type, "normal" price competition appears to
prevail. As tiie relative price rises, so does the proba-
bility of switching. Among products of the same form,
the opposite appears true. As the relative price rises, the
probability of switching falls. Possibly this unexpected
coefficient indicates that within forms some unobserved
324 JOURNAL OF AAARKETING RESEARCH, AUGUST 1985

price-quality relationship is present so that buyers of pre- Table 3

mium quality products rarely "switch down" to inferior UNRESTRICTED MODEL SPECIFICATION"
quality ones.
Product features. With control for price and advertis- Advertising
ing effects, brand name appears to have little influence interactions Price interactions
All simDl
on aggregate switching. Type and form matter more in Item terms Brand Form Type Brand Form Type
'this mature market. Also, products of the same form 1 X X
compete aggressively, whereas products of different types 2 X X
are insulated from interbrand competition. 3 X X X X
Summary. The restricted model suggests the existence 4 X X X X
5 X X X X
of two broad groups of competing products defined by 7 X X X X X
type. Within each type, products compete principally witti 8 X X X X
others of the same form, and switching patterns appear .9 X X X X X X X
largely unaffected by brand names. Switching is en- , 10 X X X X
11 X ' X
couraged by relative price differences and discouraged 12 X X X X X X
(to a lesser extent) by advertising. Within a form cate- 13 X X X X
gory, significant price segments and possibly some 14 X X X
unobservable price-quality relationship are present which 15 X X X X X X
substantially affect the nature of price competition. Fur- 16 X X X X
17 X X X X X
thermore, competition between type 1 and type 2 prod- 18 X X X X X
ucts is limited largely to products of the same form. 19 X X X X
20 X X X X X X
Unrestricted Model Results "X indicates that the variable is included in the final specification.
Information about how these effects vary across prod-
ucts is obtained by re-estimating equation 11 and allow-
ing its parameters to vary by product. In this case, the unrestricted specification. Additionally, certain defini-
columns of the 19 data matrices are highly correlated, tional redundancies in the data set required that addi-
suggesting that joint GLS estimates will provide little tional price- and advertising-interaction terms be
gain and possibly some efficiency loss in comparison with dropped.'" Table 3 is a summary of the final specifica-
OLS estimates which remain unbiased but inefficient. tion of the unrestricted model.
This coUinearity problem further affected the specifica- This severe coUinearity coupled with the singular co-
tion of the individual models. Price variation (especially variance matrix of errors (see Appendix) produced gains
within type) is minimal so that (pi/pj) is essentially con- in efficiency for some parameters and greater instability
stant. As a result, interaction terms between price, brand
name, type, and form were nearly perfectly correlated
with the individual brand name, type, and form terms. '"Interactions between marketing control variables and between
To avoid the problems induced liy severe coUinearity, a product feature variables also were excluded because of the coUineari-
number of price interaction terms were excluded in the ty problem.

Table
NUMBER OF COEFFICIENTS (BY SIGN)

Brand A Brand B Brand C

Explanatory
variable Negative Insignificant Positive Negative Insignificant Positive Negative Insignificant Positive
Constant 0 1 0 3 2 0 3 1 0
Advertising 0 3 0 0 3 2 3 1 0
Price 0 3 0 0 2 3 0 3 1
Brand 1 2 0 0 1 4 0 1 3
Form 1 0 2 2 0 3 0 1 3
Type 0 3 0 0 4 1 0 4 0
Ad-brand 0 3 0 1 3 0 0 3 0
Ad-form 0 3 0 0 2 2 0 3 0
Ad-type 3 0 0 2 3 0 3 1 0
b b b
Price-brand 1 0 0 3 0 0
b b b
Price-form 0 0 2 0 1 0
b b b
Price-type 1 0 0 0 2 0
'Parameter estimates are available in a separate Appendix.
Not specified; see Table 3 for full model specification.
MARKETING MIX, BRAND SWITCHING, AND COMPETITION 325
for others when estimated by GLS using a generalized Table 5
inverse. Overall, OLS estimated parameters were more GENERAL PARAMETER PATTERNS FOR UNRESTRICTED
stable and were judged to contain more reliable infor- MODEL
mation about the true parameter structure while, of course,
being unbiased. Table 4 is a summary of parameters es-
Number of Number of Number of Total
timated by ordinary least squares by brand; general pa- Explanatory negative zero positive number
rameter patterns are summarized in Table 5. variable coefficients coefficients coefficients specified
The specification differences from the restricted model Constant 12 1 0 19
and multicoUineadty problems limit the reliability of these Advertising 1 14 4 19
parameter estimates. The high intervariate correlations Price 0 12 7 19
indicate that aggregate measures of price and advertising Brand 2 5 12 19
Form 4 4 11 19
vary little among products and that the data contain less Type 1 12 6 19
information than would be ideal. Consequently, drop- Ad-brand 1 10 2 13
ping variables raises the likelihood that the remaining Ad-form 1 13 3 17
coefficients may be biased and the power of the signif- Ad-type 9 5 0 14
icance tests on estimated parameters reduced. Dropping Price-brand 5 0 1 6
Price-form 2 2 3 7
variables also means that a test of the linear restriction Price-type 2 2 1 5
8, = 8 is inappropriate, because model specifications
differ.
Base switching. In contrast to the restricted model, es-
timated intercepts vary substantially across products when cific quality differences or differing effectiveness of na-
product-specific factors enter the analysis. The intercepts tional advertising that focuses on image differentiation.
now can be interpreted as mean conditional switching Brand name strength also varies among products with
probabilities adjusted for the differential product-specific the same brand name, also suggesting product-specific
effects of prices, advertising, and features as well as their differences. Stronger brand names provide effective in-
interaction. In this case, four intercepts which were sig- sulation from products of the same form, implying the
nificantly less than zero in the restricted model are in- presence of brand-name-based partitions. By exploiting
distinguishable from zero,' indicating that the relative this competitive isolation, some multiproduct brands ap-
"strength" of these products was overstated by the re- pear able to reduce interbrand competition by promoting
stricted model. intrabrand rivalry.
Feature competition. On the basis of product features Price competition. High relative price appears to be
alone, competition is limited principally to products of associated with increased switching in the market as a
the same type. Within each product type, subdivisions whole, as expected. High prices relative to other prod-
in competition are defined by brand names and forms. ucts of the same brand name discourage intrabrand
In some cases, brand names have a significant role in switching, possibly reflecting product-specific factors such
increasing the probability of retaining a customer within as quality. Both these effects are especially true for the
the brand. The strength of brand names varies substan- so-called strong brand names; six of seven significant
tially across products, most likely reflecting product-spe- (simple) price coefficients are associated with products

FOR UNRESTRICTED MODEL (BY BRAND)"

Brand D Brand E Brand F

Negative Insignificant Positive Negative Insignificant Positive Negative Insignificant Positive
2 0 0 1 1 0 1 2 0
0 1 2 1 1 0 0 3 0
0 1 1 0 2 0 0 2 1
1 0 1 0 0 2 1 1 1
1 1 1 0 2 0 0 0 3
0 1 1 0 0 2 1 0 2
b b b b b
b 0 1 2
0 0 1 0 2 0 1 2 0
b b b
1 1 0 b b b
0 b b
0 1 b
1 0 0
b b b
0 0 1 2 0 0
t> b b
1 0 0 0 0 1
326
that also have positive (simple) brand name coefficients.
Therefore, the competitive insulation provided by pow-
erful brand names is only partial, not complete. For
weaker brand names, price effects are largely insignifi-
cant, indicating that these products appear more vulner-
able to similar competing products. Evidently, strong
brand name products lose buyers to competitors that price
aggressively, and weaker brand name products lose buy-
ers to similar products regardless of price.
Advertising competition. For the majority of the prod-
ucts, newspaper advertising has little impact on switch-
ing. When significant, it mostly reduces the likelihood
of switching to other products of the same type, indi-
cating that it increases inertia or product loyalty. In a
smaller number of cases, it apparently increases switch-
ing, indicating that it may provide information to buyers
and thereby lead to switching. In both cases, the impact
of advertising is minimal. (Brand image, however, may
be bolstered by national advertising which focuses on
image differentiation.)
Summary. Taken as a whole, the results for the un-
restricted model suggest patterns of competition defined
principally by product types, forms, and to a lesser ex-
tent brand names. Within each product type, stronger
brand names restrict interbrand competition through in-
creased intrabrand competition. Buyers are drawn to
weaker brand names by price reductions. Patterns of
competition for both product types are largely unaffected
by advertising, though some significant effects are evi-
dent.
DISCUSSION AND CONCLUSIONS
Empirical Findings
Most generally, the analysis of the restricted and un-
restricted models supports our original assertion that pat-
terns of competition can be usefully constructed on the
basis of buyers' responses to prices, advertising, product
features, and their interaction. Three specific interesting
findings emerge.
First, price promotion/information-oriented local
newspaper advertising both encourages and discourages
switching. For the most part, it increases buyer inertia
or loyalty, suggesting that such advertising increases re-
purchase rates and reduces switching. Significant posi-
tive coefficients also are observed, indicating that in some
cases advertising may provide buyers with additional price-
oriented information encouraging switching. In both cases,
advertising is a weak source of buyer movement.
Second, partial insulation from similar competing
products can be achieved through brand name differen-
tiation and multiple entries in the product line under the
same brand name. Some sellers use this strategy to en-
courage intrabrand competition and reduce interbrand
competition. Possibly, brand advantages may result from
image differentiation promoted by national advertising,
or stronger brands may simply be of higher quality, lo-
cally preferred, or more highly valued in relation to other
JOURNAL OF AAARKETING RESEARCH, AUGUST 1985
brands. Without data on national advertising or product
quality, neither hypothesis can be tested.
Third, within the basic market divisions of competi-
tors suggested by the analysis, the tools of competitive
rivalry differ significantly. At one extreme, strong brand
names may expand their shares by offering new products
to exploit their unique advantages whereas weaker brand
names may be forced to rely on competitive pricing and
aggressive promotion to enlarge their market shares. Most
brands have strong and weak entries. Mixtures of strength
and weakness within a single brand imply that signifi-
cantly different strategies should be pursued for growth.
Therefore, applying an aggregate market structure to all
products in tiie market may be inappropriate.
Limitations
Our findings are limited in terms of their generaliza-
bility given the form of the data used to estimate the
models. First, the findings are derived from an aggregate
conditional switching matrix. Though analysis based on
aggregate matrices clearly provides insights into patterns
of competition, the reliability of the results is limited by
the sparseness of the switching matrix: 48% of switches
were repeat purchases and 32% of the 361 elements of
the switching matrix contained zeros. Thus, only limited
information about patterns of competition between cer-
tain products is available in the data.
Second, the method used to aggregate data may limit
the findings. The data matrix was constructed with an
arbitrary data interval which may or may not correspond
to a "natural" data interval or a common purchase in-
terval. The difficulty is that no obvious ideal data inter-
val is apparent given different individual purchase in-
tervals and advertising cycles.
Third, a no-purchase category was excluded by our
definition of product switching. To incorporate a no-pur-
chase category, one must identify, at the individual level,
a regular purchase interval, assuming one exists. If none
is obvious, a prespecified one could be imposed but to
do so may introduce misleading information into the data
set. Certainly, however, the addition of such a cate-
goryif properly donewould provide greater insight
into the impact of price and advertising on switching.
The operationalization of advertising also limits our
findings. First, data on national advertising were un-
available and hence omitted. This exclusion may bias the
remaining coefficients. Second, long-term effects of both
local and national advertising were excluded. In a mar-
ket where brand names have a significant role, both local
and especially image-oriented national advertising may
have potentially significant long-term effects on switch-
ing and patterns of competition. Their omission may bias
the remaining coefficients.
Other limitations arise from our operationalization of
the price variable. Average prices fail to capture trends
in prices over the data interval. For example, an increas-
ing average price would be obscured when aggregated
and averaged over time. Second, and perhaps most im-
MARKETING MIX, BRAND SWITCHING, AND COMPETITION
portant, temporary changes in prices are lost in aver-
aging, even though these changes may be an important
determinant of individual-level switching.
The limitations of the model arise mainly from the dif-
ference in the underlying individual-based process and
the model chosen to capture aggregate elements of com-
petition. Though choice is clearly an individual-level,
dynamic process, our model captures only aggregate-level
behavior over discrete, arbitrary time periods and ig-
nores individual heterogeneity. Our model may bear lit-
tle correspondence to an individual-level model aggre-
gated to the segment or market level, and gives no insight
about the dynamics of individual-level choice. As a re-
sult, information about the impact of price promotions,
different individual purchase intervals, and buyer het-
erogeneity on switching rates is unavailable from the
models developed here. Individual-level models, or in-
dividual-level models aggregated to market level, may
provide insights to some of these areas.
Future Research and Applications
The limitations suggest potentially fruitful avenues for
future research. First, the analysis presented here sug-
gests that an individual-level model would give infor-
mation about the impact of price promotions in addition
to other control variables on switching. Constructing a
data base consisting of each customer's pairs of consec-
utive purchases, with marketing mix variables measured
in the appropriate time period, may be worthwhile. Such
models also could be expanded to include inertia and
variety-seeking operators.
Second, the analysis conducted here suggests a basic
structure which may be used to aggregate consumers into
segments and to test for similarities and differences in
market response within and across segments. That is, if
individual models could be estimated for all consumers,
their coefficients could be tested for equality and equally
responsive buyers could be grouped to form segments.
Such group-level models could be used to examine pat-
terns of competition within each segment of the market.
These models have other potentially powerful mana-
gerial uses. First, they provide a tool for simulating the
short-run impact of a product's and competitor's actions
on market shares. Given past market shares, current shares
are a simple weighted average of past shares and current
switching probabilities. By making assumptions about
competitive actions or reactions, one can easily simulate
or forecast the impact of alternative marketing policies
on market shares.
The long-run implications of such simulations also can
be explored with the models proposed here. By deriving
the steady-state switching matrix, given data on past
market shares and assumptions about competitors, one
can predict long-run market shares using the switching
matrices produced through simulations.
The models also provide a means for deriving optimal
dynamic marketing policies in a game theoretic frame-
work. As models of transition probabilities, each can be
327
used as a dynamic response function and incorporated
into normative decision models to derive optimal, com-
petitive, dynamic policies for marketing control vari-
ables. Horsky (1977), for instance, estimates the optimal
dynamic advertising policy by assuming that a brand's
transition probability is proportional to its cumulative
advertising. The richer models of transition probabilities
developed here can be used similarly to derive optimal,
competitive policies for all marketing control variables
over time in a game-theoretic framework.
Conclusions
Most fundamentally, the results of our study support
two broad assertions. First, incorporating marketing con-
trol variables in brand-switching models is productive
and potentially fruitful. By doing so, one can gain sig-
nificant new insights in investigating the impact of the
marketing mix and product features on patterns of com-
petition and market structure. Second, patterns of com-
petition appear to vary significantly throughout the mar-
ket. Great risk appears to be associated with market
structure analyses which ignore product- or brand-based
differences. Patterns of competition may be heteroge-
neous even within groups of competing products. De-
spite this complexity, great opportunity for advancing
competitive analysis appears possible by incorporating
marketing mix variables in models of brand switching
and competition for both individual- and segment-level
analysis.
APPENDIX
ERROR STRUCTURE AND ESTIMATION
FOR RESTRICTED AND UNRESTRICTED MODELS
Both regression models developed in the text can be
written generally as
(Al) S = Z8 -h
where in the unrestricted version 8 contains A^ parameter
vectors and in the restricted version it contains one. To
estimate 8 in either case requires knowledge of the co-
variance of e, denoted by X. If 2 is a diagonal matrix,
ordinary least squares (OLS) procedures produce the best
linear unbiased estimate (BLUE) of 8; if 2 is not di-
agonal, OLS procedures are inefficient relative to gen-
eralized least squares (GLS) provided the columns of Z
are sufficiently uncorrelated. The purpose of this appen-
dix is to establish the properties of X to suggest efficient
estimation procedures for 8 in equation A l .
To establish the structure of X it is important to note
that errors arise from two sources, (1) sampling error
resulting from differences between the observed and ac-
tual switching matrices and (2) specification error re-
sulting from random factors omitted from the model. That
is, e = ^ -I- I where I, denotes sampling error and |
specification error.
328
Estimation with Sampling Errors
First consider sampling error alone and the resulting
covariance matrix for the errors. For each segment /, de-
fine Tt'i = (TT,!,- ,'^iN) and s,' = (.s,i,- -.^av) where TTy is
the true (conditional) switching probability and Stj is now
the observed switching rate. By constructing a linear
Taylor series expansion, one can show that the sampling
error, denoted by 5,, is approximated by
where II, = diag ,.. .,TTW). Using this approximation.
= 0, and
or
where:
S,- - TT,)(S,- - IT,)'}.
Now the properties of ^ , are of primary interest. As
will be shown, two key properties enierge: (1) ^ , van-
ishes for large N, and (2) for finite N,, ?, is singular.
To see these properties, note that ^ , is the covariance
for a multinomial random variable so that
- TT,i1T,2 . . . -
where A^, is the number of people in the /* group or seg-
ment. Clearly, for large Ni, *, vanishes which suggests
that if the switching matrix is constructed from a large
enough sample, sampling error is not a problem and OLS
estimates are efficient. Second, to determine the rank of
* , , denote by ili* the (1,7)* element of ^ ^ and note that
- 1T,1 - 1T,-2 - . . .
J = 1
But because TT,^ comes from a conditional switching ma-
trix, Sf=i T^ij = 1 so that Ef=i \\iij = 0 for k = 1,2, . . . ,
N and rank (*,) < N and rank (4>,) < A^ for / = 1, 2,
...,N. Therefore, in small samples (when sampling er-
ror is present), ^ , is singular so that the covariance ma-
trix for the system, <b = diag(O,,.. .,OA,) is also sin-
gular.
One solution is to drop one element from each row of
the switching matrix and construct a new covariance ma-
trix ^ * which is nonsingular; similarly, alter the system
so that it is
S = Z 8 + C*
Then the BLUE of 8* is
(A2) 8* = (Zi **'Z*)"'Z; * * ' S * .
JOURNAL OF AAARKETING RESEARCH, AUGUST 1985
An alternative procedure is to retain the original model
(Al) and use a generalized inverse to compute
(A3) 8 =
where 4>G' is the generalized inverse of O.
As described here, both 8* and 8 are not feasible es-
timators because both depend on the unknown elements
of O* and O. To estimate $ , note that ^ , can be written
as
where J is an (A^ x A^) matrix of ones (the so-called
summation matrix). Therefore,
4., = ^n,r'(n, -n,jn,)n,r'
N
or
1 _ J
' ~ Ni '
And because we can estimate IT, using s,.
can be used to compute feasible estimates of 8* and 8
given by equations A2 and A3, where II, is an estimate
of n,.
Estimation with Specification Errors
Next consider specification errors alone and the re-
sulting covariance matrix of errors. If we assume that |,
are normally distributed with zero mean and covariance
matrix a | l for i = 1,2, ..., N, OLS procedures are ef-
ficient when specification error is present. If the ^, have
- covariance matrix ft with (),y 9^ 0, / T^ j , OLS produces
unbiased but inefficient coefficients. Best linear un-
biased estimates are produced by
(A4) 8 = [Z'(ft I)~'Z]"'[Z'(fl 0 I)~'S]
where is the Kronecker product. A feasible 8 can be
constructed by using the OLS residuals to construct a
consistent estimate of ft. This is the standard case of
seemingly unrelated regressions.
Estimation with Sampling and Specification Errors
Assume now that both types of error are present. Nak-
anishi and Cooper show that the covariance matrix of
errors (X) can be approximated by the sum of the co-
variance matrices for the specification (ft) and sampling
(^) errors even if ft and I> are not independent (1974,
p. 310). Because O is invariant, we have two cases de-
pending on the structure of ft.
1. ft diagonal. First if ft = o-|I for / = 1,2, . . . , A^,
AAARKETING MIX, BRAND SWITCHING, AND COMPETITION
X, is of less than full rank, because the rank (4>,) is N
1, and nondiagonal so OLS procedures are inefficient.
The covariance matrix for the system, 2 = diag(Xi, . . . ,
X^f), is not of full rank, so we can delete observations
to form a new system,
S* = Z*8* + *
and estimate the GLS
where XM< is a consistent estimate of X*. Here 8* is the
BLUE of 8*. Alternatively, we can retain the original
model Al and estimate
8G = (Z'25'Z)-' (Z'tc'S)
where Xc' is the generalized inverse of X which is a
consistent estimate of X. Here 8G is the BLUE of 8.
2. ft nondiagonal. Second, if ft is not diagonal, the
rank of X, is indeterminant because ft is not specified
beyond the fact that Wy " 0, i " j . Most likely, X, will
be of less than full rank. Additionally, ft, cannot be es-
timated in the usual fashion because ft, are not observed
independently of O,. Furthermore, X, cannot be esti-
mated if X, are assumed different for each /. If we im-
pose the additional restriction that X = X,, / = 1,2, . . . ,
A^, a consistent estimate of X can be computed by using
the OLS residuals. In the context of Al this assumption
implies that the sampling and specification errors are equal
over each (ij) pair. This situation would be most likely
to occur if all products are available in all choice situ-
ations over time. Under such an assumption, given X,
the BLUE of 8 is given by
8= 0 Hierarchical Choice Processes from Panel Data," Journal of
where X is a consistent estimate of X. If, as one might
suspect, X is of less than full rank, a generalized inverse
can be employed on the original model or observations
can be deleted and an alternative model estimated.
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