Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
Cointegration analysis of brand and category sales: Stationarity
and longrun equilibrium in market shares
Shuba Srinivasan¹*¹¹ and Frank M. Bass`
A
¹The A. Gary Anderson School of Management, University of California, Riverside, CA 92521, U.S.A.
`The University of Texas System Eugene C. McDermott Professor of Management at the University of Texas at Dallas,
Richardson, TX 750830688, U.S.A.
SUMMARY
The present study uses modern time series methodology to understand longrun equilibrium in markets and
provides additional evidence of the frequent existence of stationary market shares for frequently purchased
consumer products. Dekimpe and Hanssens, Marketing Science 1995; 14(2):G109}121 using a database of
over 400 prior studies, found that 78 per cent of the market share series they studied were stationary, but that
68 per cent of the sales series were evolving. Our "ndings reconcile these results. A major contribution of this
paper is its demonstration that the prior empirical evidence that a majority of sales series is in evolution is
consistent with stationary market shares, if brand sales and category sales are cointegrated. To the extent
that competitive activities have an e!ect on market share, an implication of our "ndings is that these
activities may, in general, only have a temporary e!ect on market share. Finally, we distinguish, from
a strategic perspective, between sales and share response at the primarydemand level (category sales),
selectivedemand level (brand sales) and relativeposition level (market share) and identify strategic scenarios
depending upon their stable/evolving nature. Copyright 2000 John Wiley & Sons, Ltd.
KEY WORDS: econometric models; competition; stationarity; evolution; cointegration analysis
1. INTRODUCTION
1.1. Overview
Interest in the potential stationarity of market shares of brands arose initially because of the
development and "tting of zeroorder stochastic brand choice models of the type proposed by
Ehrenberg [1] or of the equivalent model shown by Bass et al. [2]. These models assume that
choice probabilities of heterogeneous consumers are constant over purchase occasions. The
*Correspondence to: S. Srinivasan, The A. Gary Anderson School of Management, University of California, Riverside,
CA 92521, U.S.A.
¹Assistant Professor
¹Email: shuba.srinivasan@ucr.edu
A
Email: mzjb@utdallas.edu
Received 3 February 1999
Copyright 2000 John Wiley & Sons, Ltd. Revised April 2000
*We will return to a detailed description of the data shortly in Section 3.
averages of the choice probabilities over consumers at a given time are the market shares (share of
choices) for that time period. The assumed constancy of underlying choice probabilities would
imply unchanging market shares over time. The stochastic choice models have been shown to
provide reasonably good descriptions of aggregate purchase incidence data for brands as well as
of aggregate brand switching data. Inasmuch as market shares are known to be changing over
time because of promotions and other marketing activities, the question naturally arises as to
how "ts could be good when they are based on an assumption that implies the existence of
unchanging market shares.
Ehrenberg [3] examines markets from a stochastic brand choice framework and has concluded
that &...most markets are, however, more or less mature and approximately stationary*at least in
the medium term (that is, when measured in periods of a week or more and up to a year or two).
They may have some promotional ups and downs or the like superimposed'. This seems to
suggest the existence of unchanging individual choice probabilities that are temporarily pertur
bed by marketing activity. In Figure 1(a)}1(c) we provide a graphical illustration of the phenom
enon of stationarity in the market share of Heinz, over a 72month period from 1960 to 1965, for
the period from 1986 to 1988, and over the period from 1992 to 1994, respectively.* Casual
inspection of these graphs suggests stationary share behaviour.
These market share patterns are important, particularly in light of "ndings in the literature.
Research has found that for frequently purchased consumer goods, market shares are predomi
nantly stationary and sales series are largely evolving (e.g., References [3}6]). Notably, Dekimpe
and Hanssens [5], using a database of over 400 prior studies, found that 78 per cent of the market
share series they studied were stationary, but that 68 per cent of the sales series were evolving. Our
"ndings reconcile these results. A major contribution of this paper is its demonstration that the
prior empirical evidence that a majority of sales series is in evolution is consistent with stationary
market shares, if brand sales and category sales are cointegrated. We obtain this unique result as
an outcome of the study. To the extent that competitive activities have an e!ect on market share
[7], an implication of our "ndings is that these activities may, in general, only have a temporary
e!ect on market share. We shall discuss and utilize formal tests of stationarity and we shall
introduce and use cointegration analysis in an application of this methodology with respect to
longrun equilibrium in markets.
2. BACKGROUND
2.1. Emerging empirical generalizations concerning stationarity and evolution of
market share and sales
As pointed out in Section 1, some recent studies have examined the stationarity vs evolution in
market share and sales. Research has found that for frequently purchased consumer goods,
market shares are predominantly stationary (e.g., References [3}6]) and sales are mostly in
evolution. Therefore, marketing mix variables only appear to have a temporary e!ect on share,
while there is a potential for longterm e!ects on sales.
160 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
Figure 1. (a) Market share series for Heinz Brand in ketchup category, 1960}1965; (b) Market share series
for Heinz Brand in ketchup category, 1986}1988; (c) Market share series for Heinz Brand in ketchup
category, 1992}1994.
Dekimpe et al. [8], used timeseries analysis to examine the longrun e!ects on sales of price
promotions for ketchup, liquid detergent, soup and yogurt. Using weekly scanner data for
a period of 113 weeks, they estimated vector}autoregressive models (VAR) and vector}error
correction models (VECM). They estimated a system of equations where brand sales, price and
BRAND SALES AND CATEGORY SALES 161
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competitor's prices (all endogenous) are a function of lagged endogenous variables. Using
impulse}response analysis, they traced the over time impact of a onestandard error shock in
price. They concluded that price promotions have a signi"cantly di!erent impact on sales of
national brands versus private labels, but these e!ects are only temporary. One exception is the
soup market, where they observed a small longterm e!ect (a positive for private label and
a negative e!ect for two national brands).
Using a similar model, Dekimpe and Hanssens [9] examined the persistence e!ects on sales of
changes in marketing variables when sales series are evolving. The interested reader in referred to
Campbell and Mankiw [10], Evans [11] and Lutkepohl and Reimers [12] for other applications
of persistence analysis. Using persistence analysis. Dekimpe and Hanssens [13] measured the
longrun e!ects of advertising on sales, and concluded that advertising does have a longrun
impact on sales. They show that when sales are evolving it is possible for temporary variations in
marketing variables to have a permanent e!ect on sales (hysteresis). Therefore, it is possible when
competitive variables in#uence an evolving series, that temporary changes in a competitive
variable will have longrun (permanent) e!ects. On the other hand, in stationary markets,
Dekimpe et al. [8] have shown (when both market shares and competitive variables are
stationary) it is very unlikely that one will observe permanent o!setting competitive e!ects due to
temporary changes in marketing e!ort. This would suggest that these marketing expenditures
only have a temporary e!ect.
Recent studies have investigated the evolution of market shares. Bronnenberg et al. [14]
studied the readytodrink tea category and observed market shares are strongly in#uenced by
retailer distribution decisions through the early growth stage, but this e!ect diminishes over time.
The authors use a logically consistent model to quantify how a brand's coupled market share and
distribution evolve and to answer questions about the relative e$ciency of in#uencing share (pull)
vs seeking distribution (push). Franses et al. [15] utilize cointegration techniques to quantify the
longrun e!ects of marketing e!ort. However, they are primarily concerned with aberrant
observations that hamper the quality of data. In their illustrative example, they "nd di!erent
results for an outlier robust cointegration model as compared to nonrobust methods.
Jedidi et al. [16] studied the longrun impact of advertising and promotions on brand choice
and purchase quantity. They propose a utility framework, di!erent from the models above,
utilizing individual level scanner panel data rather than aggregate weekly data. Parameters in the
utility function (intercept, price and promotion) are a function of longtermadvertising, longterm
promotions and loyalty where longrun advertising and promotions are speci"ed as a geometric
series of past advertising and promotional activities. They found a negative longrun e!ect on
brand equity, measured by the intrinsic brand preferences of the utility function, and increasing
price and price promotion sensitivity due to longrun promotions. Advertising only had a signi"
cant positive e!ect on brand equity. They also conducted a simulation analysis to determine the
impact of changes in marketing strategies.
2.2. Modelling stationarity and longrun equilibrium using unitroot econometrics
Modern timeseries methodology such as unitroot econometrics and cointegration analysis
are well suited to study the issue of stationarity and longrun equilibrium in markets. First, unit
root tests are used to test for the presence or absence of a unit root in the data. Once a longrun
component is identi"ed as being present in a series of interest, cointegration analysis is used to
identify whether trends in variables are related to each other in the long run. The idea of using
162 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
*See Reference [23] for a detailed discussion of the econometric analysis of nonstationary data.
cointegration analysis in the study of nonstationary time series comes from the work of Engle
and Granger [17]. Cointegration analysis has been applied in a number of di!erent "elds, for
example, to study the e!ects of public policy on the longrun relationship between narcotics usage
and property crime [18], to measure the longrun relationship between advertising and sales
[19, 20], to forecast new automobile sales [21], to forecast freight rates [22], to determine the
longrun e!ect of marketing mix variables [9, 15]. For a detailed discussion of cointegration
analysis we refer the reader to Banerjee et al. [23], Enders [24] and Harris [25].
A longrun equilibrium exists between brand sales, S
R
, and category sales, C
R
, if the amount e
R
by which the actual observations S
R
deviate from the equilibrium level C
R
, given the observed
level C
R
, is a stationary time series. The equilibrium error e
R
given by +S
R
!C
R
, contains useful
information since the brand sales will move in a direction that satis"es the equilibrium.* In other
words, if +S
R¹
!C
R¹
, is low, then brand sales are low relative to category sales and we might
expect to see an increase in brand sales in future periods. On the other hand, if the term
+S
R¹
!C
R¹
, is high, we might expect a decrease in brand sales in future periods. An advantage
of cointegration analysis is that the extent of adjustment in a given period to deviations from the
longrun equilibrium is given in the estimated equation. Several di!erent testing procedures are
available to determine the existence of longrun cointegrating relationships such as the Engle and
Granger method and the multivariate extension, the Johansen method [26, 27]. Table I presents
a summary of the abovementioned literature on longrun e!ects of marketing mix variables on
sales and share.
2.3. Objectives and contributions
The major objectives of this paper are: (1) to provide additional evidence of the frequent existence
of stationary market shares for frequently purchased consumer products; (2) to demonstrate that
the prior empirical evidence that a majority of sales series is in evolution is consistent with
stationary market shares, if brand sales and category sales are cointegrated; and (3) to distinguish,
from a strategic perspective, between market response at the primarydemand level (category
sales), selectivedemand level (brand sales) and relativepositive level (market share) and identify
strategic scenarios depending upon their stable/evolving nature.
In dealing with the "rst objective, our analysis adds to the growing support for the empirical
generalization that for many markets, market shares are stationary (see for example, References
[5, 6]). Using data from 28 brands across eight product categories, we "nd that market shares
either for all brands or for major brands are stationary.
As observed earlier, previous research has found that shares tend to be stationary while sales
tend to be in evolution. What does this mean? This study contributes to an understanding and
reconciliation of this empirical observation, analytically and empirically. Given that brand and
category sales are evolving, we investigate whether these trends are related to each other. For
example, is an upward (downward) trend in brand sales related to an upward (downward) trend in
category sales? The trends would be related if there exists a longrun equilibrium or cointegrating
relationship between brand and category sales. We demonstrate that the presence of a cointegrat
ing relationship between brand and category sales also implies that market shares are mean
stationary and hence is consistent with the abovementioned empirical observation.
BRAND SALES AND CATEGORY SALES 163
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Table I. Studies looking at the longrun sales/share e!ects of marketing mix variables.
Study Data Model Findings
Dekimpe and
Hanssens [9]
1. Monthly pharmaceutical
data for 5 yr, 2. BRANDAID
data
VECM 1. Sales calls, advertising and
price di!erential have longrun
impact on sales;
2. Advertising promotion and
prices have no longrun
impact on sales
Dekimpe et al. [8] 113 Weeks scanner data
fourcategories
VAR Impulse
response
analysis
Promotions only have
temporary e!ect in stationary
market. In nonstationary
markets, small lasting e!ect,
positive for private label,
and negative for two national
brands
Franses et al. [15] Weekly scanner data for
grocery product
Cointegration
analysis
Distribution, advertising and
promotions have longrun
impact on sales
Jedidi et al. [16] Scanner panel data, 691
households. 8 yr (1984}1992).
One product class with
four brands
Individual level
choice model,
and quantity
model
Advertising has longrun
positive e!ect on sales,
promotions have a negative
longrun e!ect
Bronnenberg et al.
[14]
Weekly grocery data
1991}1996 (257 weeks) of
readytodrink tea
VAR Distribution in#uences
longrun share through early
growth, and diminishes during
later stages of product life cycle
Dekimpe and
Hanssens [5]
Database of 400 prior
analyses
Unit root tests Sales series are mostly
evolving while shares are
stationary
Dekimpe and
Hanssens [13]
Monthly advertising and
sales data
VAR
Persistence
analysis
Advertising has a longterm
e!ect on sales
Lal and
Padmanabhan [6]
Yearly data from IRI
Factbook
Regression
analysis
Relative promotional
expenditures have no impact
on longrun shares
Baghestani [19] 54 Yearly advertising and
sales observations
VECM Advertising and sales are
cointegrated
We deal with the third objective, in a deviation from previous research by distinguishing, from
a strategic perspective, between market response at the primarydemand level (category sales),
selectivedemand level (brand sales) and relativeposition level (market share) and identifying
potential scenarios depending upon their stable/evolving nature. In doing so, we extend the work
of Dekimpe et al. [8], who focus only on brand and category sales. From a strategic perspective, it
is useful to make a distinction between sales and market share. To illustrate, consider two
scenarios, one where market shares are stationary in a category that has stationary sales and the
other where market shares are stationary in a category that has evolving sales. Under the "rst
scenario, "rms are unable to improve the longrun relative and absolute positions, whereas under
the second scenario the longrun absolute positions may improve even though "rms are unable to
164 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
*Of these eight scenarios, the following three cannot occur for logical reasons: stationary market shares and evolving
brand sales of all brands in a stationary category, stationary market shares and stationary brand sales of all brands in an
evolving category, evolving market shares and stationary brand sales of all brands in a stationary category.
¹Another scenario is evolving market shares and evolving brand sales in an evolving category. While this scenario is
potentially interesting, we do not consider it in the paper since it is not present in the data used and leave further analysis
to future research.
improve their relative positions. From a managerial perspective, this distinction is important, for
instance, because the longterm pro"tability implications of the two scenarios could be quite
di!erent. Further, category sales may be driven by exogenous factors but market shares are not
and they would depend on the relative marketing activities of the "rms. We illustrate the strategic
scenarios using data from eight consumer product categories (ketchup, soup, toilet tissue, sugar,
peanut butter, dry detergent and tuna) for which scanner data are available and provide the
strategic implications of each of these scenarios. These implications underscore the importance of
distinguishing between market response at the primarydemand level (category sales), selective
demand level (brand sales) and relativeposition level (market share), which has not been done in
prior research.
The structure of the remainder of the paper is as follows. In Section 3, we provide an overview
of the strategic scenarios with respect to market shares, brand and category sales and discuss the
estimation approach. In Section 4, we describe the scanner data used and provide the empirical
results. Section 5 presents conclusions and o!ers directions for future research.
3. LONGTERM BEHAVIOUR OF MARKET SHARES, BRAND
AND CATEGORY SALES
3.1. Testing univariate equilibrium share models
When a series may be appropriately modelled as depending on a constant plus a coe$cient times
a lag of the series plus a random term, testing whether a series is stationary or evolving may
be accomplished by means of the wellknown test proposed by Dickey and Fuller [28]. When
more than one lag is involved the appropriate test is the augmented Dickey}Fuller test (ADF)
[23]. We use these tests in examining the stationarity of market shares, sales and category sales.
3.2. Overview of scenarios
Stationary vs evolving conditions in market shares, brand and category sales give rise to eight
possible scenarios.* We consider the following scenarios: stationary market shares and stationary
brand sales for all brands in a stationary category (SSS), stationary market shares and stationary
brand sales for a subset of major brands in a stationary category (SSS), stationary market shares
and evolving sales for all brands in an evolving category (SEE), stationary market shares and
evolving sales for a subset of major brands in an evolving category (SEE), and, evolving market
shares and evolving brand sales in a stationary category (EES).¹ We discuss these in turn:
(i) Stationary market shares and stationary brand sales for all brands in a stationary category
(SSS). This refers to the case where all market shares are stationary as are brand and category
sales. What does this mean from a strategic perspective? Stationary market shares imply that all
BRAND SALES AND CATEGORY SALES 165
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
gains and losses are shortlived. To the extent that competitive activities have an e!ect on market
share [7], an implication of our "ndings is that these activities may, in general, only have
a temporary e!ect on market share.
(ii) Stationary market shares and stationary brand sales for a subset of brands in a stationary
category (SSS). Under this scenario, while a subset of major brands has stationary market shares,
to the extent that marketing activity has an e!ect on shares, this scenario also implies that at least
two brands are engaged in a share war with one brand gaining at the expense of another. This
suggests that while marketing activity may cause temporary perturbations in market shares for
the subset of brands with stationary shares, this may not be case for the subset with evolving
shares, consistent with Srinivasan et al. [29].
(iii) Stationary market shares and evolving brand sales in an evolving category (SEE). This refers
to a scenario where all brands have stable market share in an expanding or declining market.
From a strategic perspective, this kind of behaviour can arise due to two conditions. First, the
category expansion may result from macroeconomic or demographic factors. Second, marketing
e!orts of "rms may drive the observed evolution in category sales. In the former case, it is
conceivable that brands do not change their marketing mix but merely ride the longrun demand
waves in an industry. But what is the meaning of stationary market shares and evolving sales? If
brand sales and category sales are cointegrated this also implies that the market is in longrun
equilibrium. Cointegration analysis is useful in "nding stationary linear combinations of category
and brand sales. If such regressions exist, then this is consistent with market shares being
stationary or stable. From a strategic perspective, this implies that "rms are unable to improve
their relative position in spite of improving their absolute longrun performance with respect to
sales.
(iv) Stationary market shares and evolving brand sales for a subset of major brands in an evolving
category (SEE). This scenario has marketing strategy implications that are similar to those for
scenario (iii) for the subset of brands that has stationary market shares. This scenario also implies
that at least two brands have evolving market shares, and to the extent that market shares are
in#uenced by marketing variables, the two "rms may be engaged in a longrun market share
battle.
(v) Evolving market shares and evolving brand sales in a stationary category (EES). Under this
scenario, given that the category sales are stationary, to the extent that marketing activity has an
e!ect on shares, at least two brands are engaged in a market share battle with one brand gaining
at the expense of another in the long run. This is consistent with Ehrenberg [30], &. . . in near
stationary markets, everybody has to run hard to stand still.' A strategic implication is that
competitive marketing activity may have a longterm impact on market shares for the evolving
subset.
3.3. Assessment of market equilibrium using cointegration analysis
If the sales series and category sales series are evolving, we investigate whether trends in variables
are related to each other. The trends are related to each other if there exists a longrun
equilibrium or cointegrating relationship between the variables. The concept of cointegration is
a powerful one since it describes the existence of an equilibrium or stationary relationship among
two or more time series, each of which is individually nonstationary [23]. In other words, an
equilibrium relationship would imply that, even if they diverge from each other in the short run,
such deviations are stochastically bounded or diminishing over time. Marketing variables may
166 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
*We are grateful to Clive W. Granger for pointing this out to us and motivating the following discussion.
¹For the three and fourbrand case, one can show that a similar condition requiring the market shares across brands to
sum to 1 is obtained.
¹Although y
G R
"e
G R
/C
R
will have E( y
G R
)"0 and E( y
G R
, y
G RI
)"0 for all kO0, E(y`
G R
) is not time constant. Thus S
R
/C
R
does not have timeconstant second moments but is &meanstationary'. We are thankful to Clive W. Granger and an
anonymous referee for pointing this out to us.
show trending patterns in the typical twoyear span of available scanner data. Cointegration
models may therefore prove useful, as such models can allow for the presence of stochastic
and deterministic trends in the data [15]. If a longrun equilibrium relationship holds
between brand sales S
R
and category sales C
R
, then they are related by an equilibrium relationship
such as:
S
R
"C
R
#e
R
(1)
The existence of a longterm relationship implies that equilibrium error e
R
represents a stationary
process. From an empirical perspective, under scenario (iii), brand sales are cointegrated with
category sales and market shares are stationary. We demonstrate this scenario analytically using
a twobrand case.* Let S
¹
and S
`
be the sales of the two brands that are evolving or I(1), and their
sum, the category sales, is also I(1). If S
¹
is cointegrated with C, then there exists a constant
¹
such that
S
¹ R
"
¹
C
R
#e
¹ R
(2)
Similarly, if S
`
is cointegrated with C, then there exists a constant
`
such that
S
` R
"
`
C
R
#e
`R
(3)
As before, the existence of a longtermrelationship implies that the equilibrium errors e
¹ R
and e
` R
represent stationary processes. Equations (2) and (3) can be written as
(1!
¹
)S
¹ R
!
¹
S
` R
"e
¹ R
(4)
!
`
S
¹ R
#(1!
`
) S
` R
"e
` R
(5)
For Equations (4) and (5) to hold, it follows that e
¹ R
"!e
` R
and
¹
#
`
"1. The latter
condition is logical consistency constraint that the market shares across brands sum to 1. This is
consistent with the interpretation of
¹
and
`
as the longrun market shares of the brands.¹
Equations (2) and (3) can be written as
S
¹ R
/C
R
"
¹
#e
¹ R
/C
R
(6)
S
` R
/C
R
"
`
#e
` R
/C
R
(7)
Hence if e
G R
(where i"1, 2) is iid, zero mean and independent of C
R
, then y
G R
"e
G R
/C
R
will have
E(y
G R
, y
G RI
)"0 for all kO0 and so will look like white noise in terms of its mean properties.¹
This implies that the market shares de"ned by S
¹ R
/C
R
and S
` R
/C
R
are meanstationary and have
BRAND SALES AND CATEGORY SALES 167
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*Though the likelihoodratio test and AIC/SIC information criterion approach are equivalent, the real di!erence is in the
signi"cance levels, which are usually "xed at 5 per cent in hypothesis testing, and are selected automatically (typically
starting at more than 10 per cent in small samples but converging to 0 for larger ones) in the information criterion
approach. Loose signi"cance levels are not necessarily the best choice in cointegration analysis and the discussion on this
issue cannot be regarded as closed with a clear guideline. Model choice by residual correlation statistics (such as
Ljung}Box Q) has often been reported to yield the poorest results.
longrun equilibrium values given by
¹
and
`
. Thus we demonstrate, analytically and
empirically (in Section 4), that the prior empirical evidence that a majority of sales series is in
evolution is consistent with stationary market shares, if brand sales and category sales are
cointegrated.
Several di!erent testing procedures are available to determine the existence of such longrun
cointegrating relationships such as the Engle and Granger method [17] and the multivariate
extension, the Johansen method [26, 27]. While the former uses an ordinary leastsquares
approach, the latter uses a maximumlikelihood method that tests for the number of cointegrat
ing regressions. In this paper we will apply the Johansen maximumlikelihood estimator, which is
the most widely used approach. The interested reader is referred to Maddala and Kim [31, pp.
155}197], who present an excellent review on estimation of cointegrated systems.
3.4. Vector error correction models (VECM)
Engle and Granger [17] show that the presence of a cointegrating relationship implies that the
data are generated according to a partial adjustment or errorcorrection mechanism. The
equilibrium error ensures that, after shortrun deviations from the equilibrium, the system will
return to its longrun equilibrium. In other words, the shortrun dynamics are in#uenced by the
deviation from the longrun relationship. These shortrun dynamics are captured in the VECM.
The errorcorrection model is obtained by adding the terms containing the lagged residuals as
shown below:
S
¹ R
S
` R
C
R
"
a
¹"
a
`"
a
`"
#
1¹
0 0
0
1`
0
0 0
!
e
1¹ R¹
e
1` R¹
e
! R¹
#
,
G¯¹
b
¹¹
b
¹`
b
¹`
b
`¹
b
``
b
``
b
`¹
b
``
b
``
S
¹ RG
S
` RG
C
RG
#
u
¹ R
u
` R
u
` R
(8)
where N is the order to the model determined using the loglikelihood criterion.* The
error correction term is obtained from the cointegrating regression. The coe$cients
1¹
,
1`
and
!
measure the speed of adjustment of the dependent variables towards the longrun
equilibrium.
To summarize, our framework consists of three major steps. First, we assess the presence of
evolution versus stability in sales (or market share) by observing the behaviour of the series over
time. The absence of a unit root indicates meanreverting behaviour or stationarity. The presence
of a unit root indicates that there is an evolutionary component in sales or market share. Next, if
the data indicate the presence of unit roots, we investigate whether these nonstationary compo
nents are related to each other. Finally, if cointegration has been established, we test for the
existence of a partial adjustment equilibrium or errorcorrecting behaviour. Further, we illustrate
the strategic scenarios described in Section 3.2 using data from the eight consumer product
categories.
168 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
*The use of di!erent samples for the two databases on ketchup causes us to classify the two into di!erent scenarios and we
shall return to this issue shortly.
¹Retailers typically assign each product a SKU (similar to the universal product code (UPC)) and use it as a unique
identi"er for their products to help track sales, etc.
¹We start by including 12 lags, determine the greatest lag with a signi"cant tvalue and retest using this number of lags.
A constant is included and we test for trends and seasonality in the data.
A
Seasonality can cause nonstationarity and persistent e!ects (see for example, Reference [35]). Controlling for seasonal
ity, we "nd that the series is stationary.
4. DATA DESCRIPTION AND EMPIRICAL RESULTS
A.C. Nielsen household scanner panel data from two test markets in the U.S. on the purchases of
ketchup, peanut butter, tuna, toilet tissue, dry detergent, soup and sugar were used to construct
the time series of weekly shares, brand and category sales. In addition, we used another database
for the ketchup category, that of store movement data supplied by A.C. Nielsen for the period
from 1992 to 1994. The latter has a sample of 690 stores across ten regions in the US.* Of these
categories, two databases, the ketchup scanner panel data and the soup scanner panel data, have
also been examined by Dekimpe et al. [8]. We compare our "ndings with theirs later in this
section.
Our database aggregates across varieties to the brand level, consistent with our focus on the
maintenance of market share equilibrium at the brand level rather than at the Stock Keeping
Unit (SKU) level.¹ However, this causes some loss of information due to possible underlying
heterogeniety among varieties. Thus, the competitive interaction e!ects may be subjected to
aggregation bias [32, 33]. To control for this bias, we performed pooling tests to determine
whether we can pool the di!erent varieties for a brand. Over 90 per cent of the varieties could be
pooled consistent with Link [34], who recommends using data within homogeneous subsets to
overcome the bias issue. Market share of a brand is calculated as the share of the pooled unit sales
of the brand. In all categories, we consider the major brands and aggregated all brands other than
the major brands into one "gure referred to as Rest in all the categories. This resulted in a total of
28 brands in the eight databases that we analyse. Each time series consists of 104 weekly
observations. We provide a brief description of the brands considered in each category in
Table II. We discuss the results for each one of the "ve scenarios in turn.
(i) Stationary market shares and stationary brand sales in a stationary category (SSS). We "nd
this case holds for two categories*ketchup and soup. We describe the results for each of these
categories in turn. We conducted the unit root test; the results in Table II showthat market shares
of all brands are stationary while the brand sales of all brands as well as category sales are
stationary.¹ Therefore, the ketchup market is consistent with stationarity or with the existence of
a longrun equilibrium.
Next, we examine the soup category. We control for seasonal e!ects in sales by using the
seasonal equivalent of Equation (5) for the ADF test (see Reference [5]).
A
Our results summarized
in Table II show that market shares of Campbell brand and Rest are stationary as are brand sales
and category sales. Thus the soup category is consistent with stationarity. Therefore, we "nd that
in the long run the relative position of the players is una!ected by the marketing mix activity and
all gains and losses are temporary, consistent with Lal and Padmanabhan [6].
We should point out that these ketchup category results are consistent with those obtained by
Dekimpe et al. [8] using the same data source. We extend their analysis by examining market
BRAND SALES AND CATEGORY SALES 169
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
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170 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
Table III. Johansen's FIML test of cointegrating rank.
Likelihood 5 Per cent
''º°°
'
°''' ""`
Hypothesized
ratio critical value No. of CE(s)
''º°°
°''' ""`
87.34 39.89 Yes Noneº
47.51 24.31 Yes At most 1º
21.67 12.53 Yes At most 2º
0.91 3.84 No At most 3
ºdenotes rejection of the hypothesis at 5 per cent signi"cance level.
shares, in addition to brand and category sales. In a divergence from their results, we "nd that the
soup market is stationary, whereas they found evidence of evolution in sales. One possible
explanation is that we control for seasonality. As they point out, more work is needed to enhance
the power of unit root tests as it is sometimes di$cult to classify a series as being stationary or
evolving with a low persistence level.
(ii) Stationary market shares and stationary brand sales for a subset of major brands in
a stationary category (SSS). We "nd this to be valid in one category*toilet tissue. The unit root
test results summarized in Table II show that the market shares of Northern and Rest are
stationary, while the market shares of Charmin and Cottonelle are evolving. Further, the sales of
Northern and Rest brands are stationary, while those of Charmin and Cottonelle are evolving.
Category sales are stationary. Therefore, a submarket consisting of two major brands has
stationary market shares. From a strategic perspective, to the extent that marketing activity has
an e!ect on shares, this scenario implies that at least two brands may be engaged in a share war
with one brand gaining at the expense of another. These brands are Charmin and Cottonelle in
the toilet tissue category. Thus, while marketing activity causes temporary perturbations in
market shares for the subset of brands with stationary shares, this may not be the case for the
subset with evolving shares [29].
(iii) Stationary market shares and evolving brand sales in an evolving category (SEE). This case
refers to a situation where market shares are stationary, or in longrun equilibrium, even though
brand and category sales are evolving. We "nd this condition to hold in three catego
ries*ketchup, sugar and peanut butter. Unit root test results, which are summarized in Table II,
show that market shares of all brands are stationary. The sales of the brands*Heinz, Hunts, Del
Monte and Rest*are evolving. Next, we examine the category sales. Our test results show that
category sales are also evolving. In this case, we proceed to examine whether there is a cointegrat
ing relationship between each of the brand and category sales.
Cointegration analysis is performed on four variables: sales of Heinz, Hunts, Del Monte and
category sales. First, we need to determine the number of lags to include in the cointegration
relation. We use the Johansen and Juselius estimation method [27]. The PCFiml software is used
for estimation purposes [36]. This method determines the cointegration rank, the number of
signi"cant cointegrating vectors and the associated vectors with the longrun parameters. Several
di!erent test procedures exist to determine the cointegration rank, with the most widely used
being the trace test and the eigenvalue test (see References [26, 27]).
The Johansen FIML test indicated the presence of three cointegrating relationships among the
variables. The results of this analysis are provided in Table III.
BRAND SALES AND CATEGORY SALES 171
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
Table IV. Longrun equilibrium relationship between brand sales and category
salesº.
Variable S
'°'"´
S
'""''
S
'°' `º"'°
C 0.607' 0.126' 0.056'
(0.005) (0.0028) (0.0014)
ADF statistic !7.15 !4.88 !6.59
Critical value !2.76 !2.76 !2.76
Cointegration Yes Yes Yes
ºThe standard error of the estimate is included in parenthesis. The critical value (at 5 per cent
level) for unit root tests obtained from Philips and Oularis [38].
'Signi"cant at p(0.01.
We "nd that there are three signi"cant cointegrating vectors. The "rst cointegrating vector
shows the longrun relationship between Heinz sales and category sales, the second one the
longrun relationship between Hunts sales and category sales and the third the relationship
between Del Monte sales and category sales. The results reported are the socalled restricted
longrun relationships. Following Doornik and Hendry [37], we "rst estimated the unrestricted
relationship and next tested for restriction using loglikelihood ratio tests. Based on this analysis,
we concluded that sales of Heinz is only signi"cant in the "rst longrun relationship and was
constrained to zero in the other longrun relationships. Similarly, we concluded that sales of
Hunts (Del Monte) is only signi"cant in the second (third) longrun relationship and was
constrained to zero in the other longrun relationships. The cointegrating vectors are reported in
Table IV.
As described in the previous section, the concept of cointegration allows us to describe the
existence of an equilibrium relationship between two series, each of which is nonstationary. The
intuition is that nonstationary movements in category sales remove nonstationary movements
in brand sales, so that only transitory components are left in the residuals.
We test for the condition that e
G R
, the residuals from each of the cointegrating regressions, as in
Equations (2) and (3), are iid, zero mean and independent of C
R
. As pointed out in Section 3.2, this
will then imply that y
G R
"e
G R
/C
R
will have E( y
R
, y
RI
)"0 for all kO0 and so will look like white
noise in terms of its mean properties. Johansen's FIML test has provided the cointegrating
vectors and has established the stationarity of the residuals of the cointegrating regressions.
Nevertheless, we run one more test proposed by Philips and Oularis [37] to con"rm that the
residuals from the cointegrating regression are white noise (in Table IV). Further, we test for
independence between e
G R
and C
R
. In all three cases, we "nd that the residuals are whitenoise
processes and independent of C
R
. Therefore, the interpretation of the coe$cients is that the
longrun market share of Heinz is 60.7 percent, the longrun market share of Hunts is 12.6
percent and the longrun market share of Del Monte is 5.5 percent; all are signi"cant at the 1
percent level, and the longrun market shares are meanstationary. While each of the brand and
category sales may move up or down, a longrun equilibrium exists, towards which the market
adjusts.
In Johansen's method, the cointegrating regression is estimated jointly with the error correc
tion model. As pointed out earlier, the idea is that a portion of the disequilibriumfrom one period
to the next is corrected in the next period. The output from the estimation of the errorcorrection
model is shown in Table V.
172 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
Table V. Results of the VECM for the ketchup categoryº.
Variable S
'°'"´
S
'""''
S
'°' `º"'°
C (!1) !0.646'
(0.208)
S
'°'"´
(!1) 0.584° !0.013°
(0.264) (0.007)
S
'""''
(!1)
S
'°' `º"'°
(!1) 0.138 !0.199'
(0.124) (0.085)
ES
'°'"´
(!1) !1.257' * *
(0.283)
ES
'""''
(!1) * !0.188' *
(0.070)
ES
'°' `º"'°
(!1) * * !0.395'
(0.097)
ºThe standard error of the estimate is included in parenthesis.
'Signi"cant at p(0.01, °Signi"cant at p(0.05 and °Signi"cant at p(0.10.
The sign * indicates the row variables is assumed to have no e!ect on the dependent
variable in the corresponding column. (!1) denotes the oneperiod lag. The number of lags is
determined using the loglikelihood criterion. ES
'°'"´ R
"S
'°'"´ R
!0.607C
R
; ES
'""'' R
"
S
'""'' R
!0.126C
R
and ES
'°' `º"'° R
"S
'""'' R
!0.056C
R
.
We estimated the system of equations speci"ed in (8) using full information maximum
likelihood. Following Dekimpe and Hanssens [9], we only include parameter estimates, which
have a tvalue greater than one. Insigni"cant parameters are deleted stepwise, "rst deleting the
parameter with the lowest tvalue and next reestimating the equation, deleting the parameter
with the next lowest tvalue and so on.
In the case of three major brands, Heinz, Hunts and Del Monte, the coe$cients of the
errorcorrection terms are negative as expected and signi"cant at the 1 percent level with
magnitudes of !1.25, !0.18 and !0.395, respectively. As mentioned earlier, an interpretation
of these coe$cients is that they re#ect the speed of adjustment of the corresponding dependent
variable towards the equilibrium. Thus, it is worth noting that Heinz, the market leader in terms
of market share, has the fastest speed of adjustment towards equilibrium while Hunts, the market
follower, is the slowest in terms of speed of adjustment. Del Monte, the market challenger, adjusts
faster than Hunts to equilibrium, suggesting that Del Monte is aggressively defending its share.
The results are consistent with the two goals of marketing as stated by Bass et al. [39], &One
purpose of marketing activity is to make behaviour nonstationary in a direction that is
favourable to a brand. Another purpose is to prevent behaviour from becoming nonstationary in
a direction which is not favourable to a brand'.
One di!erence we observe in the ketchup category results across the two di!erent data sets is
that, for the period from 1986 to 1988, market shares are stationary, and sales of all major brands
and category sales are stationary, while in the data set for the period from 1992 to 1994, market
shares are stationary but sales of all major brands and category sales are evolving. One possible
explanation for this is the di!erence between the two samples. The sample from 1986 to 1988 uses
weekly household scanner data on two test markets in the U.S., whereas the sample from 1992 to
1994 uses store movement data from 690 stores across 10 regions in the U.S. Yet, there is
BRAND SALES AND CATEGORY SALES 173
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
*The empirical estimates from cointegration analysis and error correction models for the categories, sugar, peanut butter
and detergent are available with the authors and are not reported here in the interest of space.
consistency in the results with respect to the variables that are the focus of this paper: market
shares of major brands are stationary in both samples. This is an important point since category
sales may be driven by exogenous factors, hence regional di!erences matter, but market shares
are not and may depend only on the relative marketing activities of the "rms.
For the sugar category, unit root tests indicate that the market shares of C&H brand and Rest
are stationary while the sales of C&H as well as the brand sales of Rest are evolving as are
category sales. For the peanut butter category, these tests indicate that market shares of Ji!,
Skippy, Peter Pan and Rest are stationary, while brand and category sales are evolving.
Cointegration analysis and errorcorrection modelling for the sugar and peanut butter categories
reveal that these markets are also consistent with the existence of longrun equilibrium.*
Dekimpe and Hanssens [5] found that 78 per cent of the market share series they studied were
stationary, but that 68 per cent of the sales series were evolving. Our "ndings reconcile these
results.
(iv) Stationary market shares and evolving brand sales for a subset of major brands in an evolving
category (SEE). The dry detergent category is an exemplar for this scenario. We consider "ve
major brands*Surf, Tide, Cheer, Oxydol and Rest. Unit root tests summarized in Table II show
that market shares of Cheer and Oxydol are stationary, while those of Surf, Tide and Rest are
evolving. The sales of the brands Surf, Cheer, Oxydol and Rest are evolving while Tide sales
are stationary. The test indicates that category sales are also evolving. Next, we examine the
presence of a cointegrating relationship between the brand sales of Cheer and Oxydol and
category sales by performing the regressions of brand sales with category sales. We "nd that
a subset of the market consisting of the major brands Cheer and Oxydol is in longrun
equilibrium, while the subset consisting of Tide, Surf and Rest is evolving. In contrast, the Tide
brand has stationary sales and a nonstationary market share in a category that is evolving
downward and this suggests that Tide is gaining ground relative to competitors. These cases are
of interest. The question of the longrun relationship between the shares and marketing activity of
the brands is beyond the scope of this paper and we postpone this analysis to further research (see
for example, Reference [29]).
(v) Evolving market shares and evolving brand sales in a stationary category (EES). The brands
considered in the tuna category are ChickenofSea, Starkist and Rest. The test results sum
marized in Table II indicate that brand market shares and brand sales are evolving, while
category sales are stationary. Since all the market shares are evolving and sum to 1, this implies
that the cointegrating rank using the Johansen method is 1 with the longrun equilibrium
relationship between the brands having the coe$cients (1, 1, 1). Therefore, from a strategic
perspective, marketing activity may improve the relative position (share) as well as the absolute
position of some brands under this scenario.
5. CONCLUSIONS AND FUTURE RESEARCH
The major focus and contribution of this paper has been to study the longrun equilibrium in
market shares. We accomplish three objectives in this paper. First, our analysis adds to the
growing support for the empirical generalization that for many markets, market shares are
174 S. SRINIVASAN AND FRANK M. BASS
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
stationary and in longrun equilibrium. Using data from 28 brands across eight product
categories, we "nd that market shares either for all brands or for major brands are stationary.
Dekimpe and Hanssens [5], using a database of over 400 prior studies, found that 78 per cent of
the market share series they studied were stationary, but that 68 per cent of the sales series were
evolving. Our "ndings reconcile these results. While each of the brand and category sales may
move up or down, there exists a longrun equilibrium towards which the market adjusts. A major
contribution of this paper is its demonstration, empirically and analytically, that the prior
empirical evidence that a majority of sales is in evolution is consistent with stationary market
shares, if brand and category sales are cointegrated. To the extent that competitive activities have
an e!ect on market share [7], an implication of our "ndings is that these activities may, in general,
only have a temporary e!ect on market share.
From a strategic perspective, we distinguish between market response at the primary demand
level (category sales), selective demand level (brand sales) and relative position level (market
share) and identify strategic scenarios depending upon their stable/evolving nature. In doing so,
we extend the work of Dekimpe et al. [8], who focus only on brand and category sales. The study
of market shares is important for several reasons. Among them, category and brand sales may be
driven by exogenous factors, while market shares depend mostly on the relative marketing
activity of "rms. Further, the managerial implications are di!erent; for example, consider the
implications of scenarios (i) and (iii) outlined in Section 3.2. Under the former, "rms are unable to
improve the longrun relative and absolute positions whereas under the latter scenario the
longrun absolute positions may improve even though "rms are unable to improve their relative
positions. From a managerial perspective, this distinction is important; for instance, the long
term pro"tability implications of the two scenarios could be quite di!erent.
Our results indicate that promotions and other marketing activities are unlikely to increase
share in the long run. Recently, Mela et al. [40] examined the longterm e!ects of promotion and
advertising on consumer sensitivities to price and promotion and found that although these
variables do in#uence consumer sensitivities, they do not in#uence longterm market share,
a result that is entirely consistent with the existence of longrun equilibrium.
There exists the potential to disturb equilibrium through new products and product improve
ments and, from a managerial perspective, the most fruitful approach for obtaining share gains
would appear to be an emphasis on such activities. A recent study reported by James Findlay of
Information Resources Inc. [44] indicates that of 240 product categories with thousands of brands
scanned in 1992 and 1993, only 164 brands increased share by more than three share points; of
those 164 brands, 80 per cent were associated with new product initiatives of one sort or another.
An additional area of managerial exploration associated with stationary markets is that of
possible reduced promotional spending. Ehrenberg et al. [4] have studied the aftere!ects of
pricerelated consumer promotions across many di!erent brands and product categories. They
assessed four aspects of possible aftere!ects of promotional sales peaks, including beforetoafter
sales and beforetoafter repeat buying. They concluded that consumer promotions for estab
lished brands have no noticeable e!ect on subsequent sales or brand loyalty. Further, they
suggest that management implications point towards reduced rather than increased spending on
pricerelated promotions. However, not very much is known about equilibrium spending levels
that are required to maintain equilibrium shares. Unilateral reductions would seem to be risky
but worth exploring. Procter and Gamble recently experimented with reductions in consumer
and trade promotions [42, 43] with mixed results. A fruitful area of future research is to examine
the role of competitive marketing variables in maintaining market share equilibrium.
BRAND SALES AND CATEGORY SALES 175
Copyright 2000 John Wiley & Sons, Ltd. Appl. Stochastic Models Bus. Ind. 2000; 16:159}177
ACKNOWLEDGEMENTS
We thank the Editor, Jef L. Teugels and the referees for their very helpful comments that have greatly
improved the paper. We also thank Peter Popkowski Leszczyc, Philip Hans Franses, Clive W. Granger,
Dominique M. Hanssens and the Marketing Seminar participants at the University of Texas at Dallas, the
University of California, Irvine and the University of California, Riverside for their comments on an earlier
version of the paper.
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only have a temporary e!ect on market share. Our "ndings reconcile these results. market shares are predominantly stationary and sales series are largely evolving (e. some recent studies have examined the stationarity vs evolution in market share and sales. 2. however. A major contribution of this paper is its demonstration that the prior empirical evidence that a majority of sales series is in evolution is consistent with stationary market shares. more or less mature and approximately stationary*at least in the medium term (that is. References [3}6]) and sales are mostly in evolution. BASS averages of the choice probabilities over consumers at a given time are the market shares (share of choices) for that time period.. while there is a potential for longterm e!ects on sales. Ind. Research has found that for frequently purchased consumer goods. if brand sales and category sales are cointegrated. They may have some promotional ups and downs or the like superimposed'.160 S.. particularly in light of "ndings in the literature. In Figure 1(a)}1(c) we provide a graphical illustration of the phenomenon of stationarity in the market share of Heinz. Research has found that for frequently purchased consumer goods. the question naturally arises as to how "ts could be good when they are based on an assumption that implies the existence of unchanging market shares. Dekimpe and Hanssens [5]. respectively. 2000.most markets are.* Casual inspection of these graphs suggests stationary share behaviour. for the period from 1986 to 1988. The assumed constancy of underlying choice probabilities would imply unchanging market shares over time.g. found that 78 per cent of the market share series they studied were stationary.. The stochastic choice models have been shown to provide reasonably good descriptions of aggregate purchase incidence data for brands as well as of aggregate brand switching data. Stochastic Models Bus. in general. marketing mix variables only appear to have a temporary e!ect on share. SRINIVASAN AND FRANK M. BACKGROUND 2.1. Appl. over a 72month period from 1960 to 1965. when measured in periods of a week or more and up to a year or two). Therefore. This seems to suggest the existence of unchanging individual choice probabilities that are temporarily perturbed by marketing activity. Copyright 2000 John Wiley & Sons. 16:159}177 . *We will return to a detailed description of the data shortly in Section 3. These market share patterns are important.g. Notably. We obtain this unique result as an outcome of the study. Inasmuch as market shares are known to be changing over time because of promotions and other marketing activities. Emerging empirical generalizations concerning stationarity and evolution of market share and sales As pointed out in Section 1. but that 68 per cent of the sales series were evolving. Ltd. using a database of over 400 prior studies. References [3}6]).. and over the period from 1992 to 1994. Ehrenberg [3] examines markets from a stochastic brand choice framework and has concluded that &. an implication of our "ndings is that these activities may. To the extent that competitive activities have an e!ect on market share [7]. We shall discuss and utilize formal tests of stationarity and we shall introduce and use cointegration analysis in an application of this methodology with respect to longrun equilibrium in markets. market shares are predominantly stationary (e.
Ind. Ltd. They estimated a system of equations where brand sales. 1992}1994. used timeseries analysis to examine the longrun e!ects on sales of price promotions for ketchup. 16:159}177 . 1986}1988.BRAND SALES AND CATEGORY SALES 161 Figure 1. [8]. (b) Market share series for Heinz Brand in ketchup category. Appl. Dekimpe et al. (a) Market share series for Heinz Brand in ketchup category. soup and yogurt. they estimated vector}autoregressive models (VAR) and vector}error correction models (VECM). Using weekly scanner data for a period of 113 weeks. Stochastic Models Bus. 1960}1965. 2000. (c) Market share series for Heinz Brand in ketchup category. price and Copyright 2000 John Wiley & Sons. liquid detergent.
they are primarily concerned with aberrant observations that hamper the quality of data. cointegration analysis is used to identify whether trends in variables are related to each other in the long run. 2. Once a longrun component is identi"ed as being present in a series of interest. that temporary changes in a competitive variable will have longrun (permanent) e!ects. Recent studies have investigated the evolution of market shares. Evans [11] and Lutkepohl and Reimers [12] for other applications of persistence analysis. but this e!ect diminishes over time. 2000. [14] studied the readytodrink tea category and observed market shares are strongly in#uenced by retailer distribution decisions through the early growth stage. they "nd di!erent results for an outlier robust cointegration model as compared to nonrobust methods.162 S. Using persistence analysis. Dekimpe and Hanssens [9] examined the persistence e!ects on sales of changes in marketing variables when sales series are evolving. Ind. and concluded that advertising does have a longrun impact on sales. Dekimpe et al. Using impulse}response analysis. Franses et al. BASS competitor's prices (all endogenous) are a function of lagged endogenous variables. However. On the other hand. where they observed a small longterm e!ect (a positive for private label and a negative e!ect for two national brands). First. but these e!ects are only temporary. [16] studied the longrun impact of advertising and promotions on brand choice and purchase quantity. Bronnenberg et al. They propose a utility framework. they traced the over time impact of a onestandard error shock in price. 16:159}177 . [15] utilize cointegration techniques to quantify the longrun e!ects of marketing e!ort.2. Modelling stationarity and longrun equilibrium using unitroot econometrics Modern timeseries methodology such as unitroot econometrics and cointegration analysis are well suited to study the issue of stationarity and longrun equilibrium in markets. it is possible when competitive variables in#uence an evolving series. One exception is the soup market. Using a similar model. price and promotion) are a function of longterm advertising. The interested reader in referred to Campbell and Mankiw [10]. The authors use a logically consistent model to quantify how a brand's coupled market share and distribution evolve and to answer questions about the relative e$ciency of in#uencing share (pull) vs seeking distribution (push). This would suggest that these marketing expenditures only have a temporary e!ect. Dekimpe and Hanssens [13] measured the longrun e!ects of advertising on sales. utilizing individual level scanner panel data rather than aggregate weekly data. Jedidi et al. In their illustrative example. measured by the intrinsic brand preferences of the utility function. Appl. Ltd. [8] have shown (when both market shares and competitive variables are stationary) it is very unlikely that one will observe permanent o!setting competitive e!ects due to temporary changes in marketing e!ort. in stationary markets. longterm promotions and loyalty where longrun advertising and promotions are speci"ed as a geometric series of past advertising and promotional activities. unit root tests are used to test for the presence or absence of a unit root in the data. The idea of using Copyright 2000 John Wiley & Sons. di!erent from the models above. Therefore. They show that when sales are evolving it is possible for temporary variations in marketing variables to have a permanent e!ect on sales (hysteresis). Advertising only had a signi"cant positive e!ect on brand equity. and increasing price and price promotion sensitivity due to longrun promotions. Parameters in the utility function (intercept. They found a negative longrun e!ect on brand equity. Stochastic Models Bus. They concluded that price promotions have a signi"cantly di!erent impact on sales of national brands versus private labels. SRINIVASAN AND FRANK M. They also conducted a simulation analysis to determine the impact of changes in marketing strategies.
and (3) to distinguish. As observed earlier. (2) to demonstrate that the prior empirical evidence that a majority of sales series is in evolution is consistent with stationary market shares. from a strategic perspective. is low. Ltd. selectivedemand level (brand sales) and relativepositive level (market share) and identify strategic scenarios depending upon their stable/evolving nature. S . Appl. *See Reference [23] for a detailed discussion of the econometric analysis of nonstationary data. if the amount e R R R by which the actual observations S deviate from the equilibrium level C . to forecast new automobile sales [21]. 27].* In other words. we might expect a decrease in brand sales in future periods. Cointegration analysis has been applied in a number of di!erent "elds.3. between market response at the primarydemand level (category sales). Given that brand and category sales are evolving. the Johansen method [26. Stochastic Models Bus. is high. given the observed R R level C . Table I presents a summary of the abovementioned literature on longrun e!ects of marketing mix variables on sales and share. In dealing with the "rst objective. The equilibrium error e given by +S ! C . then brand sales are low relative to category sales and we might R\ R\ expect to see an increase in brand sales in future periods. 2000. A longrun equilibrium exists between brand sales. we "nd that market shares either for all brands or for major brands are stationary. to study the e!ects of public policy on the longrun relationship between narcotics usage and property crime [18]. 20]. is an upward (downward) trend in brand sales related to an upward (downward) trend in category sales? The trends would be related if there exists a longrun equilibrium or cointegrating relationship between brand and category sales. C . Using data from 28 brands across eight product categories.BRAND SALES AND CATEGORY SALES 163 cointegration analysis in the study of nonstationary time series comes from the work of Engle and Granger [17]. An advantage R\ R\ of cointegration analysis is that the extent of adjustment in a given period to deviations from the longrun equilibrium is given in the estimated equation. to forecast freight rates [22]. 15]. for example. Copyright 2000 John Wiley & Sons. contains useful R R R R information since the brand sales will move in a direction that satis"es the equilibrium. Ind. 16:159}177 . Objectives and contributions The major objectives of this paper are: (1) to provide additional evidence of the frequent existence of stationary market shares for frequently purchased consumer products. For example. 2. We demonstrate that the presence of a cointegrating relationship between brand and category sales also implies that market shares are mean stationary and hence is consistent with the abovementioned empirical observation. References [5. What does this mean? This study contributes to an understanding and reconciliation of this empirical observation. 6]). if +S ! C . [23]. if brand sales and category sales are cointegrated. Several di!erent testing procedures are available to determine the existence of longrun cointegrating relationships such as the Engle and Granger method and the multivariate extension. to determine the longrun e!ect of marketing mix variables [9. For a detailed discussion of cointegration analysis we refer the reader to Banerjee et al. if the term +S ! C . analytically and empirically. our analysis adds to the growing support for the empirical generalization that for many markets. market shares are stationary (see for example. we investigate whether these trends are related to each other. Enders [24] and Harris [25]. previous research has found that shares tend to be stationary while sales tend to be in evolution. to measure the longrun relationship between advertising and sales [19. On the other hand. and category sales. is a stationary time series.
and diminishes during later stages of product life cycle Sales series are mostly evolving while shares are stationary Advertising has a longterm e!ect on sales Relative promotional expenditures have no impact on longrun shares Advertising and sales are cointegrated 1. Monthly pharmaceutical VECM data for 5 yr. we extend the work of Dekimpe et al. consider two scenarios. SRINIVASAN AND FRANK M. in a deviation from previous research by distinguishing. [15] Weekly scanner data for grocery product Scanner panel data. [16] Bronnenberg et al. Under the "rst scenario. "rms are unable to improve the longrun relative and absolute positions. Appl. From a strategic perspective. advertising and promotions have longrun impact on sales Advertising has longrun positive e!ect on sales. Ind. [8] 113 Weeks scanner data fourcategories VAR Impulse response analysis Franses et al. In doing so. between market response at the primarydemand level (category sales). Sales calls. one where market shares are stationary in a category that has stationary sales and the other where market shares are stationary in a category that has evolving sales. and quantity model VAR Jedidi et al. from a strategic perspective. who focus only on brand and category sales. In nonstationary markets. advertising and price di!erential have longrun impact on sales. To illustrate. BRANDAID data Dekimpe et al. whereas under the second scenario the longrun absolute positions may improve even though "rms are unable to Copyright 2000 John Wiley & Sons. 16:159}177 . [14] Dekimpe and Hanssens [5] Dekimpe and Hanssens [13] Lal and Padmanabhan [6] Baghestani [19] Unit root tests VAR Persistence analysis Regression analysis VECM We deal with the third objective. One product class with four brands Weekly grocery data 1991}1996 (257 weeks) of readytodrink tea Database of 400 prior analyses Monthly advertising and sales data Yearly data from IRI Factbook 54 Yearly advertising and sales observations Cointegration analysis Individual level choice model. BASS Table I. small lasting e!ect. 2000. 2. selectivedemand level (brand sales) and relativeposition level (market share) and identifying potential scenarios depending upon their stable/evolving nature. Stochastic Models Bus. 691 households. [8]. 2. Studies looking at the longrun sales/share e!ects of marketing mix variables. Ltd. 8 yr (1984}1992). positive for private label. Study Dekimpe and Hanssens [9] Data Model Findings 1. promotions have a negative longrun e!ect Distribution in#uences longrun share through early growth.164 S. it is useful to make a distinction between sales and market share. and negative for two national brands Distribution. Advertising promotion and prices have no longrun impact on sales Promotions only have temporary e!ect in stationary market.
we describe the scanner data used and provide the empirical results. we do not consider it in the paper since it is not present in the data used and leave further analysis to future research. Section 5 presents conclusions and o!ers directions for future research. BRAND AND CATEGORY SALES 3. Overview of scenarios Stationary vs evolving conditions in market shares. soup. Stochastic Models Bus. We illustrate the strategic scenarios using data from eight consumer product categories (ketchup. Testing univariate equilibrium share models When a series may be appropriately modelled as depending on a constant plus a coe$cient times a lag of the series plus a random term. and. we provide an overview of the strategic scenarios with respect to market shares. stationary market shares and stationary brand sales of all brands in an evolving category. While this scenario is potentially interesting.* We consider the following scenarios: stationary market shares and stationary brand sales for all brands in a stationary category (SSS). Ltd.BRAND SALES AND CATEGORY SALES 165 improve their relative positions. When more than one lag is involved the appropriate test is the augmented Dickey}Fuller test (ADF) [23]. stationary market shares and evolving sales for all brands in an evolving category (SEE). brand and category sales give rise to eight possible scenarios. evolving market shares and stationary brand sales of all brands in a stationary category. evolving market shares and evolving brand sales in a stationary category (EES). stationary market shares and stationary brand sales for a subset of major brands in a stationary category (SSS). 2000. stationary market shares and evolving sales for a subset of major brands in an evolving category (SEE). We use these tests in examining the stationarity of market shares. The structure of the remainder of the paper is as follows. In Section 4.R We discuss these in turn: (i) Stationary market shares and stationary brand sales for all brands in a stationary category (SSS). peanut butter. dry detergent and tuna) for which scanner data are available and provide the strategic implications of each of these scenarios. Further. What does this mean from a strategic perspective? Stationary market shares imply that all *Of these eight scenarios. testing whether a series is stationary or evolving may be accomplished by means of the wellknown test proposed by Dickey and Fuller [28]. which has not been done in prior research. for instance. 3.1. brand and category sales and discuss the estimation approach. RAnother scenario is evolving market shares and evolving brand sales in an evolving category. Ind. 3. LONGTERM BEHAVIOUR OF MARKET SHARES. category sales may be driven by exogenous factors but market shares are not and they would depend on the relative marketing activities of the "rms. toilet tissue. Copyright 2000 John Wiley & Sons. These implications underscore the importance of distinguishing between market response at the primarydemand level (category sales). because the longterm pro"tability implications of the two scenarios could be quite di!erent. sugar. 16:159}177 .2. From a managerial perspective. Appl. sales and category sales. In Section 3. This refers to the case where all market shares are stationary as are brand and category sales. selectivedemand level (brand sales) and relativeposition level (market share). this distinction is important. the following three cannot occur for logical reasons: stationary market shares and evolving brand sales of all brands in a stationary category.
only have a temporary e!ect on market share. Under this scenario. This is consistent with Ehrenberg [30].166 S. Cointegration analysis is useful in "nding stationary linear combinations of category and brand sales. Under this scenario. SRINIVASAN AND FRANK M. then this is consistent with market shares being stationary or stable. . to the extent that marketing activity has an e!ect on shares. This scenario has marketing strategy implications that are similar to those for scenario (iii) for the subset of brands that has stationary market shares. the two "rms may be engaged in a longrun market share battle. we investigate whether trends in variables are related to each other. 2000. this scenario also implies that at least two brands are engaged in a share war with one brand gaining at the expense of another. 16:159}177 . in general. Ind. this may not be case for the subset with evolving shares. To the extent that competitive activities have an e!ect on market share [7]. In the former case. (ii) Stationary market shares and stationary brand sales for a subset of brands in a stationary category (SSS). such deviations are stochastically bounded or diminishing over time. this implies that "rms are unable to improve their relative position in spite of improving their absolute longrun performance with respect to sales.3. Stochastic Models Bus. to the extent that marketing activity has an e!ect on shares. The concept of cointegration is a powerful one since it describes the existence of an equilibrium or stationary relationship among two or more time series. this kind of behaviour can arise due to two conditions. (iv) Stationary market shares and evolving brand sales for a subset of major brands in an evolving category (SEE). This refers to a scenario where all brands have stable market share in an expanding or declining market. (iii) Stationary market shares and evolving brand sales in an evolving category (SEE). . (v) Evolving market shares and evolving brand sales in a stationary category (EES). and to the extent that market shares are in#uenced by marketing variables. Assessment of market equilibrium using cointegration analysis If the sales series and category sales series are evolving. But what is the meaning of stationary market shares and evolving sales? If brand sales and category sales are cointegrated this also implies that the market is in longrun equilibrium. This scenario also implies that at least two brands have evolving market shares. an implication of our "ndings is that these activities may. Marketing variables may Copyright 2000 John Wiley & Sons. each of which is individually nonstationary [23]. even if they diverge from each other in the short run. in nearstationary markets. given that the category sales are stationary. In other words. everybody has to run hard to stand still. consistent with Srinivasan et al. the category expansion may result from macroeconomic or demographic factors. First. marketing e!orts of "rms may drive the observed evolution in category sales. while a subset of major brands has stationary market shares. an equilibrium relationship would imply that. it is conceivable that brands do not change their marketing mix but merely ride the longrun demand waves in an industry. This suggests that while marketing activity may cause temporary perturbations in market shares for the subset of brands with stationary shares. Ltd. [29]. Appl. Second. BASS gains and losses are shortlived. From a strategic perspective. The trends are related to each other if there exists a longrun equilibrium or cointegrating relationship between the variables. From a strategic perspective.' A strategic implication is that competitive marketing activity may have a longterm impact on market shares for the evolving subset. at least two brands are engaged in a market share battle with one brand gaining at the expense of another in the long run. 3. If such regressions exist. &.
E(y ) is not time constant. one can show that a similar condition requiring the market shares across brands to sum to 1 is obtained.BRAND SALES AND CATEGORY SALES 167 show trending patterns in the typical twoyear span of available scanner data. Appl. brand sales are cointegrated with category sales and market shares are stationary. We are thankful to Clive W. 2000. and their sum. the existence of a longterm relationship implies that the equilibrium errors e and e R R represent stationary processes. The latter R R condition is logical consistency constraint that the market shares across brands sum to 1. RFor the three. under scenario (iii). This is consistent with the interpretation of and as the longrun market shares of the brands.R Equations (2) and (3) can be written as S /C " R R S /C " R R #e /C R R #e /C R R (6) (7) Hence if e (where i"1. 16:159}177 . If a longrun equilibrium relationship holds between brand sales S and category sales C . From an empirical perspective. y )"0 for all kO0.and fourbrand case. Ltd.S GR GR\I This implies that the market shares de"ned by S /C and S /C are meanstationary and have R R R R *We are grateful to Clive W. then they are related by an equilibrium relationship R R such as: S " C #e R R R (1) The existence of a longterm relationship implies that equilibrium error e represents a stationary R process. Cointegration models may therefore prove useful. then there exists a constant such that S " C #e R R R (3) (2) As before. zero mean and independent of C . then there exists a constant such that S " C #e R R R Similarly. Stochastic Models Bus. it follows that e "!e and # "1. is also I(1). as such models can allow for the presence of stochastic and deterministic trends in the data [15]. y )"0 for all kO0 and so will look like white noise in terms of its mean properties. If S is cointegrated with C.* Let S and S be the sales of the two brands that are evolving or I(1). Thus S /C GR GR R GR GR GR\I GR R R does not have timeconstant second moments but is &meanstationary'. Granger and an anonymous referee for pointing this out to us. then y "e /C will have GR R GR GR R E(y . if S is cointegrated with C. SAlthough y "e /C will have E(y )"0 and E(y . Copyright 2000 John Wiley & Sons. the category sales. We demonstrate this scenario analytically using a twobrand case. Equations (2) and (3) can be written as (1! )S ! S "e R R R ! S #(1! )S "e R R R (4) (5) For Equations (4) and (5) to hold. Granger for pointing this out to us and motivating the following discussion. 2) is iid. Ind.
155}197]. First. Loose signi"cance levels are not necessarily the best choice in cointegration analysis and the discussion on this issue cannot be regarded as closed with a clear guideline. we illustrate the strategic scenarios described in Section 3. Model choice by residual correlation statistics (such as Ljung}Box Q) has often been reported to yield the poorest results. Appl. The errorcorrection model is obtained by adding the terms containing the lagged residuals as shown below: S a R 1 S " a # 0 R C a 0 R 0 1 0 0 0 ! e b b e # b b b 1R\ G b e b b !R\ 1R\ . that the prior empirical evidence that a majority of sales series is in evolution is consistent with stationary market shares. the latter uses a maximumlikelihood method that tests for the number of cointegrating regressions. Finally. 2000. Ltd. Several di!erent testing procedures are available to determine the existence of such longrun cointegrating relationships such as the Engle and Granger method [17] and the multivariate extension. Copyright 2000 John Wiley & Sons. the system will return to its longrun equilibrium. 1 1 and measure the speed of adjustment of the dependent variables towards the longrun ! equilibrium. if the data indicate the presence of unit roots. The coe$cients . Ind. In other words. Thus we demonstrate. *Though the likelihoodratio test and AIC/SIC information criterion approach are equivalent. we investigate whether these nonstationary components are related to each other. which are usually "xed at 5 per cent in hypothesis testing. To summarize. While the former uses an ordinary leastsquares approach. who present an excellent review on estimation of cointegrated systems. In this paper we will apply the Johansen maximumlikelihood estimator. we assess the presence of evolution versus stability in sales (or market share) by observing the behaviour of the series over time. b S u R\G R S # u (8) R\G R C u R\G R where N is the order to the model determined using the loglikelihood criterion. and are selected automatically (typically starting at more than 10 per cent in small samples but converging to 0 for larger ones) in the information criterion approach. Vector error correction models (VECM) Engle and Granger [17] show that the presence of a cointegrating relationship implies that the data are generated according to a partial adjustment or errorcorrection mechanism. 3. if cointegration has been established. The presence of a unit root indicates that there is an evolutionary component in sales or market share. Next.4. our framework consists of three major steps. the Johansen method [26.* The error correction term is obtained from the cointegrating regression. after shortrun deviations from the equilibrium. Stochastic Models Bus. which is the most widely used approach. BASS longrun equilibrium values given by and . the real di!erence is in the signi"cance levels. SRINIVASAN AND FRANK M. the shortrun dynamics are in#uenced by the deviation from the longrun relationship. Further.2 using data from the eight consumer product categories. The interested reader is referred to Maddala and Kim [31. if brand sales and category sales are cointegrated. pp. we test for the existence of a partial adjustment equilibrium or errorcorrecting behaviour.168 S. These shortrun dynamics are captured in the VECM. The equilibrium error ensures that. 27]. The absence of a unit root indicates meanreverting behaviour or stationarity. 16:159}177 . analytically and empirically (in Section 4).
Thus the soup category is consistent with stationarity. determine the greatest lag with a signi"cant tvalue and retest using this number of lags. Each time series consists of 104 weekly observations. Nielsen for the period from 1992 to 1994. Market share of a brand is calculated as the share of the pooled unit sales of the brand.* Of these categories. We conducted the unit root test.R However. the competitive interaction e!ects may be subjected to aggregation bias [32. peanut butter.C. In addition. (i) Stationary market shares and stationary brand sales in a stationary category (SSS). We extend their analysis by examining market *The use of di!erent samples for the two databases on ketchup causes us to classify the two into di!erent scenarios and we shall return to this issue shortly. [8].C. etc. brand and category sales. A constant is included and we test for trends and seasonality in the data. Our database aggregates across varieties to the brand level. we performed pooling tests to determine whether we can pool the di!erent varieties for a brand. Nielsen household scanner panel data from two test markets in the U. RRetailers typically assign each product a SKU (similar to the universal product code (UPC)) and use it as a unique identi"er for their products to help track sales. who recommends using data within homogeneous subsets to overcome the bias issue. that of store movement data supplied by A. [8] using the same data source. Controlling for seasonality. this causes some loss of information due to possible underlying heterogeniety among varieties. we "nd that in the long run the relative position of the players is una!ected by the marketing mix activity and all gains and losses are temporary. We discuss the results for each one of the "ve scenarios in turn. the ketchup market is consistent with stationarity or with the existence of a longrun equilibrium.S Therefore. Ind. To control for this bias. Stochastic Models Bus. have also been examined by Dekimpe et al. Next. 2000.BRAND SALES AND CATEGORY SALES 169 4. dry detergent. tuna. SWe start by including 12 lags.A Our results summarized in Table II show that market shares of Campbell brand and Rest are stationary as are brand sales and category sales. We compare our "ndings with theirs later in this section. DATA DESCRIPTION AND EMPIRICAL RESULTS A. Therefore. Thus. A Seasonality can cause nonstationarity and persistent e!ects (see for example. on the purchases of ketchup. two databases. Reference [35]). the ketchup scanner panel data and the soup scanner panel data. We provide a brief description of the brands considered in each category in Table II. 33]. Copyright 2000 John Wiley & Sons. We should point out that these ketchup category results are consistent with those obtained by Dekimpe et al. We "nd this case holds for two categories*ketchup and soup. the results in Table II show that market shares of all brands are stationary while the brand sales of all brands as well as category sales are stationary. toilet tissue. consistent with our focus on the maintenance of market share equilibrium at the brand level rather than at the Stock Keeping Unit (SKU) level. We control for seasonal e!ects in sales by using the seasonal equivalent of Equation (5) for the ADF test (see Reference [5]). we used another database for the ketchup category. we examine the soup category. Ltd. We describe the results for each of these categories in turn. Over 90 per cent of the varieties could be pooled consistent with Link [34]. The latter has a sample of 690 stores across ten regions in the US. Appl. soup and sugar were used to construct the time series of weekly shares.S. This resulted in a total of 28 brands in the eight databases that we analyse. we "nd that the series is stationary. we consider the major brands and aggregated all brands other than the major brands into one "gure referred to as Rest in all the categories. 16:159}177 . In all categories. consistent with Lal and Padmanabhan [6].
Rest 5. Hunts.03* Category sales Market share ADF range and signi"cance level Empirical observation: category.36 !3. ¹oilet tissue (1985}1987) Northern and Rest 4.19 to !6.32 to !5. Brand sales Stationary (all) Stationary (all) !3. BASS III: SSE Stationary (major brand subset) Stationary (all) Evolving !4. Ltd. SRINIVASAN AND FRANK M.65 to !7.10 !3. ERIM scanner data (1985}1987) and store movement data (1992}1994). *Signi"cance at the 5 per cent level. Stochastic Models Bus. 2000. Classi"cation of Scenarios . Rest 2. (year). . ¹una (1985}1987) Chicken of Sea. Peter Pan. Dry detergent (1986}1988) Cheer and Oxydol 8. Ketchup (1992}1994) Heinz. Hunts. brands Strategic implications All gains and losses are temporary Scenarios Market share I: SSS Stationary (all) 2000 John Wiley & Sons.02 !5. 16:159}177 A.170 Copyright Table II. denotes signi"cance at the 1 per cent level. Rest Appl. Ketchup (1986}1988) Heinz. DM.67 Same as case (iii) for the stationary subset Marketing activity may improve relative as well as absolute position of some of the brands V: EES Stationary (major brand subset) Evolving (all) Stationary Evolving (major brand subset) Evolving (all) None are signi"cant 1.56 to !7. Sugar (1985}1987) C&H and Rest 6.10 Stationary (major brand subset) Evolving (all) All gains and losses are temporary for the major brand subset Longrun absolute performance is evolving but "rms are unable to improve relative position IV: SEE Evolving !3. Skippy and Rest 7. Ind. Peanut butter (1985}1987) Ji!. Nielsen: Singlesource scanner data (1986}1988).67 S.40 to !7. Soup (1986}1988) Campbell and Rest 3.C. II: SSS Stationary !4. Star Kist. Del Monte.
31 12. One possible explanation is that we control for seasonality. Therefore. The unit root test results summarized in Table II show that the market shares of Northern and Rest are stationary. to the extent that marketing activity has an e!ect on shares.84 Yes Yes Yes No None At most 1 At most 2 At most 3 ' Hypothesized No. while marketing activity causes temporary perturbations in market shares for the subset of brands with stationary shares. This case refers to a situation where market shares are stationary. (iii) Stationary market shares and evolving brand sales in an evolving category (SEE). the number of signi"cant cointegrating vectors and the associated vectors with the longrun parameters. These brands are Charmin and Cottonelle in the toilet tissue category. we examine the category sales. Stochastic Models Bus.89 24. sugar and peanut butter.BRAND SALES AND CATEGORY SALES 171 shares. The Johansen FIML test indicated the presence of three cointegrating relationships among the variables. Johansen's FIML test of cointegrating rank. In a divergence from their results. 2000. the sales of Northern and Rest brands are stationary. in addition to brand and category sales. Next. we proceed to examine whether there is a cointegrating relationship between each of the brand and category sales. Thus. we "nd that the soup market is stationary. this scenario implies that at least two brands may be engaged in a share war with one brand gaining at the expense of another. First. Copyright 2000 John Wiley & Sons. Category sales are stationary. Del Monte and Rest*are evolving. of CE(s) denotes rejection of the hypothesis at 5 per cent signi"cance level. Several di!erent test procedures exist to determine the cointegration rank. a submarket consisting of two major brands has stationary market shares. We "nd this condition to hold in three categories*ketchup.91 5 Per cent critical value 39. with the most widely used being the trace test and the eigenvalue test (see References [26. while the market shares of Charmin and Cottonelle are evolving. 16:159}177 . We use the Johansen and Juselius estimation method [27]. (ii) Stationary market shares and stationary brand sales for a subset of major brands in a stationary category (SSS). Hunts.51 21. show that market shares of all brands are stationary. Cointegration analysis is performed on four variables: sales of Heinz. Further. Our test results show that category sales are also evolving. The sales of the brands*Heinz. 27]). From a strategic perspective. Table III. more work is needed to enhance the power of unit root tests as it is sometimes di$cult to classify a series as being stationary or evolving with a low persistence level. this may not be the case for the subset with evolving shares [29]. whereas they found evidence of evolution in sales. This method determines the cointegration rank. Appl. Likelihood ratio 87. Ind. we need to determine the number of lags to include in the cointegration relation. Hunts. even though brand and category sales are evolving. or in longrun equilibrium.53 3. The PCFiml software is used for estimation purposes [36].67 0. Unit root test results. which are summarized in Table II. Del Monte and category sales. The results of this analysis are provided in Table III.34 47. while those of Charmin and Cottonelle are evolving. As they point out. We "nd this to be valid in one category*toilet tissue. In this case. Ltd.
172 S. Variable C ADF statistic Critical value Cointegration S & S & 0.0028) !4. Longrun equilibrium relationship between brand sales and category sales .88 !2. SRINIVASAN AND FRANK M.76 Yes S " . BASS Table IV.126 (0.
056 (0. Based on this analysis. The results reported are the socalled restricted longrun relationships. y )"0 for all kO0 and so will look like white GR GR R R R\I noise in terms of its mean properties. As pointed out earlier. In Johansen's method. In all three cases. The intuition is that nonstationary movements in category sales remove nonstationary movements in brand sales. towards which the market adjusts.76 Yes The standard error of the estimate is included in parenthesis. the longrun market share of Hunts is 12. the cointegrating regression is estimated jointly with the error correction model.0014) !6.5 percent.005) !7. we "rst estimated the unrestricted relationship and next tested for restriction using loglikelihood ratio tests.607 (0. 16:159}177 . Similarly. and the longrun market shares are meanstationary.2. Therefore. all are signi"cant at the 1 percent level.59 !2. The cointegrating vectors are reported in Table IV.6 percent and the longrun market share of Del Monte is 5. we test for independence between e and C . Stochastic Models Bus. The critical value (at 5 per cent level) for unit root tests obtained from Philips and Oularis [38]. As pointed out in Section 3. The "rst cointegrating vector shows the longrun relationship between Heinz sales and category sales. Johansen's FIML test has provided the cointegrating vectors and has established the stationarity of the residuals of the cointegrating regressions. are iid. we "nd that the residuals are whitenoise GR R processes and independent of C . the second one the longrun relationship between Hunts sales and category sales and the third the relationship between Del Monte sales and category sales. we concluded that sales of Hunts (Del Monte) is only signi"cant in the second (third) longrun relationship and was constrained to zero in the other longrun relationships. the idea is that a portion of the disequilibrium from one period to the next is corrected in the next period. We "nd that there are three signi"cant cointegrating vectors.76 Yes 0. the residuals from each of the cointegrating regressions.7 percent. each of which is nonstationary. the interpretation of the coe$cients is that the R longrun market share of Heinz is 60.01.15 !2. Copyright 2000 John Wiley & Sons. a longrun equilibrium exists. we concluded that sales of Heinz is only signi"cant in the "rst longrun relationship and was constrained to zero in the other longrun relationships. Appl. Signi"cant at p(0. as in GR Equations (2) and (3). Further. this R will then imply that y "e /C will have E(y . zero mean and independent of C . we run one more test proposed by Philips and Oularis [37] to con"rm that the residuals from the cointegrating regression are white noise (in Table IV). Ltd. As described in the previous section. 2000. The output from the estimation of the errorcorrection model is shown in Table V. Following Doornik and Hendry [37]. Nevertheless. Ind. We test for the condition that e . + 0. so that only transitory components are left in the residuals. the concept of cointegration allows us to describe the existence of an equilibrium relationship between two series. While each of the brand and category sales may move up or down.
Variable C (!1) S (!1) & S (!1) & S (!1) " .BRAND SALES AND CATEGORY SALES 173 Table V. Results of the VECM for the ketchup category .
+ ES (! 1) & ES (!1) & ES (!1) " .
+ !1.138 (0.208) 0.264) 0.188 (0.124) * !0.584 (0.070) * S & S " .257 (0.283) * * S & !0.646 (0.
097) The standard error of the estimate is included in parenthesis.013 (0. + !0. ES " & & R R &R S !0.10.05 and Signi"cant at p(0.007) !0. The sign * indicates the row variables is assumed to have no e!ect on the dependent variable in the corresponding column. Signi"cant at p(0.199 (0. The number of lags is determined using the loglikelihood criterion.126C and ES "S !0.607C .056C .01.395 (0. ES "S !0.085) * * !0. Signi"cant at p(0. (!1) denotes the oneperiod lag. R &R R " .
which have a tvalue greater than one. As mentioned earlier. !0. the market challenger.S. we only include parameter estimates. Ind. 2000. the coe$cients of the errorcorrection terms are negative as expected and signi"cant at the 1 percent level with magnitudes of !1. the market leader in terms of market share.18 and !0. Another purpose is to prevent behaviour from becoming nonstationary in a direction which is not favourable to a brand'. [39]. Stochastic Models Bus. Appl. Hunts and Del Monte. Heinz. 16:159}177 . is the slowest in terms of speed of adjustment. One di!erence we observe in the ketchup category results across the two di!erent data sets is that.S. respectively. Del Monte.. Yet. it is worth noting that Heinz.25. One possible explanation for this is the di!erence between the two samples. whereas the sample from 1992 to 1994 uses store movement data from 690 stores across 10 regions in the U. Thus. suggesting that Del Monte is aggressively defending its share. + R &R R We estimated the system of equations speci"ed in (8) using full information maximum likelihood. &One purpose of marketing activity is to make behaviour nonstationary in a direction that is favourable to a brand. Ltd. adjusts faster than Hunts to equilibrium. for the period from 1986 to 1988. the market follower. an interpretation of these coe$cients is that they re#ect the speed of adjustment of the corresponding dependent variable towards the equilibrium. Insigni"cant parameters are deleted stepwise. deleting the parameter with the next lowest tvalue and so on.395. The results are consistent with the two goals of marketing as stated by Bass et al. Following Dekimpe and Hanssens [9]. has the fastest speed of adjustment towards equilibrium while Hunts. market shares are stationary but sales of all major brands and category sales are evolving. In the case of three major brands. while in the data set for the period from 1992 to 1994. "rst deleting the parameter with the lowest tvalue and next reestimating the equation. market shares are stationary. The sample from 1986 to 1988 uses weekly household scanner data on two test markets in the U. there is Copyright 2000 John Wiley & Sons. and sales of all major brands and category sales are stationary.
Therefore.* Dekimpe and Hanssens [5] found that 78 per cent of the market share series they studied were stationary. 1. market shares are *The empirical estimates from cointegration analysis and error correction models for the categories. SRINIVASAN AND FRANK M. BASS consistency in the results with respect to the variables that are the focus of this paper: market shares of major brands are stationary in both samples. CONCLUSIONS AND FUTURE RESEARCH The major focus and contribution of this paper has been to study the longrun equilibrium in market shares. Cheer. First. hence regional di!erences matter. while category sales are stationary. These cases are of interest. while the subset consisting of Tide. The dry detergent category is an exemplar for this scenario. but that 68 per cent of the sales series were evolving. we examine the presence of a cointegrating relationship between the brand sales of Cheer and Oxydol and category sales by performing the regressions of brand sales with category sales. Tide and Rest are evolving. unit root tests indicate that the market shares of C&H brand and Rest are stationary while the sales of C&H as well as the brand sales of Rest are evolving as are category sales. this implies that the cointegrating rank using the Johansen method is 1 with the longrun equilibrium relationship between the brands having the coe$cients (1. Unit root tests summarized in Table II show that market shares of Cheer and Oxydol are stationary. peanut butter and detergent are available with the authors and are not reported here in the interest of space. Appl. our analysis adds to the growing support for the empirical generalization that for many markets. Starkist and Rest. but market shares are not and may depend only on the relative marketing activities of the "rms.174 S. sugar. while brand and category sales are evolving. from a strategic perspective. Oxydol and Rest. Stochastic Models Bus. We "nd that a subset of the market consisting of the major brands Cheer and Oxydol is in longrun equilibrium. We consider "ve major brands*Surf. Cointegration analysis and errorcorrection modelling for the sugar and peanut butter categories reveal that these markets are also consistent with the existence of longrun equilibrium. while those of Surf. Reference [29]). The test results summarized in Table II indicate that brand market shares and brand sales are evolving. In contrast. 16:159}177 . Peter Pan and Rest are stationary. Cheer. (v) Evolving market shares and evolving brand sales in a stationary category (EES). The question of the longrun relationship between the shares and marketing activity of the brands is beyond the scope of this paper and we postpone this analysis to further research (see for example. marketing activity may improve the relative position (share) as well as the absolute position of some brands under this scenario. For the sugar category. Next. The brands considered in the tuna category are ChickenofSea. 5. Tide. Skippy. 2000. Oxydol and Rest are evolving while Tide sales are stationary. We accomplish three objectives in this paper. (iv) Stationary market shares and evolving brand sales for a subset of major brands in an evolving category (SEE). The sales of the brands Surf. The test indicates that category sales are also evolving. For the peanut butter category. Surf and Rest is evolving. This is an important point since category sales may be driven by exogenous factors. the Tide brand has stationary sales and a nonstationary market share in a category that is evolving downward and this suggests that Tide is gaining ground relative to competitors. Copyright 2000 John Wiley & Sons. these tests indicate that market shares of Ji!. 1). Since all the market shares are evolving and sum to 1. Ind. Our "ndings reconcile these results. Ltd.
Our "ndings reconcile these results. Our results indicate that promotions and other marketing activities are unlikely to increase share in the long run. selective demand level (brand sales) and relative position level (market share) and identify strategic scenarios depending upon their stable/evolving nature. not very much is known about equilibrium spending levels that are required to maintain equilibrium shares. From a managerial perspective. Unilateral reductions would seem to be risky but worth exploring. Recently. an implication of our "ndings is that these activities may. if brand and category sales are cointegrated. that the prior empirical evidence that a majority of sales is in evolution is consistent with stationary market shares. in general. From a strategic perspective. the most fruitful approach for obtaining share gains would appear to be an emphasis on such activities. of those 164 brands. category and brand sales may be driven by exogenous factors. They assessed four aspects of possible aftere!ects of promotional sales peaks. A recent study reported by James Findlay of Information Resources Inc. [8]. only 164 brands increased share by more than three share points. Further. Among them. 80 per cent were associated with new product initiatives of one sort or another. this distinction is important. for example. they do not in#uence longterm market share. [40] examined the longterm e!ects of promotion and advertising on consumer sensitivities to price and promotion and found that although these variables do in#uence consumer sensitivities. Appl. "rms are unable to improve the longrun relative and absolute positions whereas under the latter scenario the longrun absolute positions may improve even though "rms are unable to improve their relative positions. Ehrenberg et al. a result that is entirely consistent with the existence of longrun equilibrium. [4] have studied the aftere!ects of pricerelated consumer promotions across many di!erent brands and product categories. Copyright 2000 John Wiley & Sons. In doing so. for instance. the longterm pro"tability implications of the two scenarios could be quite di!erent. A major contribution of this paper is its demonstration. Further. The study of market shares is important for several reasons. While each of the brand and category sales may move up or down. There exists the potential to disturb equilibrium through new products and product improvements and. Using data from 28 brands across eight product categories. there exists a longrun equilibrium towards which the market adjusts. They concluded that consumer promotions for established brands have no noticeable e!ect on subsequent sales or brand loyalty. from a managerial perspective.BRAND SALES AND CATEGORY SALES 175 stationary and in longrun equilibrium. while market shares depend mostly on the relative marketing activity of "rms.2. we extend the work of Dekimpe et al. An additional area of managerial exploration associated with stationary markets is that of possible reduced promotional spending. 43] with mixed results. consider the implications of scenarios (i) and (iii) outlined in Section 3. 16:159}177 . but that 68 per cent of the sales series were evolving. empirically and analytically. Ind. However. they suggest that management implications point towards reduced rather than increased spending on pricerelated promotions. we "nd that market shares either for all brands or for major brands are stationary. who focus only on brand and category sales. A fruitful area of future research is to examine the role of competitive marketing variables in maintaining market share equilibrium. found that 78 per cent of the market share series they studied were stationary. [44] indicates that of 240 product categories with thousands of brands scanned in 1992 and 1993. Mela et al. the managerial implications are di!erent. Dekimpe and Hanssens [5]. To the extent that competitive activities have an e!ect on market share [7]. Procter and Gamble recently experimented with reductions in consumer and trade promotions [42. Ltd. including beforetoafter sales and beforetoafter repeat buying. we distinguish between market response at the primary demand level (category sales). Stochastic Models Bus. Under the former. using a database of over 400 prior studies. only have a temporary e!ect on market share. 2000.
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