- 05 Jul 2006
- Working Paper
Measuring Consumer and Competitive Impact with Elasticity Decompositions
Executive Summary — Do marketing actions expand the market or steal business from rival firms? One research method suggests that all of the demand created by an incremental advertising investment would be generated by market expansion; another suggests that the same increase would be stolen from rival firms. Steenburgh explains why these seemingly contradictory results actually are complementary and provide a more comprehensive understanding of the investment's impact. Key concepts include:
- Combine the consumer and the competitive points of view for a more complete understanding of the marketing investment's impact.
In this article, I discuss three methods of decomposing the elasticity of own-good demand. One of the methods, the decision-based decomposition (Gupta, 1988), is useful in determining the influence of changes in consumers' decisions on the growth in owngood demand. The other two methods, the unit-based decomposition (van Heerde et al., 2003) and the share-based decomposition (Berndt et al., 1997), are useful in determining whether the growth in own-good demand has been stolen from competing goods. The objective of this article is to provide a clear and accurate method that attributes the growth in own-good demand to changes in: (1) consumers' decisions, (2) competitive demand, and (3) competitive market share. I will accomplish this by settling some confusion about what the decision- and share-based decompositions mean, by discussing how each of the decompositions relate to the others, and by discussing the research questions that each of the decompositions can answer.