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A Look on the Cost Side: Market Share and the Competitive Environment

Author

Listed:
  • William Boulding

    (Duke University)

  • Richard Staelin

    (Duke University)

Abstract

In this paper we develop a model relating market share to average costs. We start with a theoretical model of the factors that affect the firm's average cost curve, partitioning these factors into (a) measurable firm and competitive environment characteristics, and (b) unobserved factors that are either fixed, random, or follow a first-order autoregressive process. We then link this theoretical model to an empirical model in which we specify three average cost equations for the organizational areas of purchasing, production, and marketing. Main effects for initial (lagged) market share position, as well as their interactions with factors characterizing the firm's competitive environment, represent the variables of key theoretical interest in our equations. We estimate these equations using PIMS data, and control for fixed, contemporaneous, and autoregressive unobservable factors. Our results suggest that market share can often lead to market power in the form of lower average costs. However, the firm's operating environment greatly moderates the effect of market share on average cost. In particular, we find that market share position only leads to lower average costs when the organizational unit operates in a competitive environment that gives it motivation and ability to realize power from its market share position.

Suggested Citation

  • William Boulding & Richard Staelin, 1993. "A Look on the Cost Side: Market Share and the Competitive Environment," Marketing Science, INFORMS, vol. 12(2), pages 144-166.
    • Handle: RePEc:inm:ormksc:v:12:y:1993:i:2:p:144-166
    DOI: 10.1287/mksc.12.2.144
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    Citations

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    Cited by:

    1. William Boulding & Markus Christen, 2008. "Disentangling Pioneering Cost Advantages and Disadvantages," Marketing Science, INFORMS, vol. 27(4), pages 699-716, 07-08.
    2. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.
    3. Bykadorov, Igor & Ellero, Andrea & Moretti, Elena & Vianello, Silvia, 2009. "The role of retailer's performance in optimal wholesale price discount policies," European Journal of Operational Research, Elsevier, vol. 194(2), pages 538-550, April.
    4. Buzzell, Robert D., 2004. "The PIMS program of strategy research: A retrospective appraisal," Journal of Business Research, Elsevier, vol. 57(5), pages 478-483, May.
    5. William Boulding & Markus Christen, 2003. "Sustainable Pioneering Advantage? Profit Implications of Market Entry Order," Marketing Science, INFORMS, vol. 22(3), pages 371-392.
    6. Mitsukuni Nishida, 2017. "First-Mover Advantage Through Distribution: A Decomposition Approach," Marketing Science, INFORMS, vol. 36(4), pages 590-609, July.
    7. Annacker, Dirk & Hildebrandt, Lutz, 2004. "Unobservable effects in structural models of business performance," Journal of Business Research, Elsevier, vol. 57(5), pages 507-517, May.
    8. Mitsukuni Nishida, 2018. "A Structural Analysis of Entry Order, Performance, and Geography: The Case of the Convenience-Store Industry in Japan," KIER Working Papers 993, Kyoto University, Institute of Economic Research.
    9. Paul-Valentin Ngobo & Eric Stéphany, 2001. "Les différences de performance financière entre les entreprises: résultats du marché français," Revue Finance Contrôle Stratégie, revues.org, vol. 4(1), pages 89-121, March.
    10. Annacker, Dirk & Hildebrandt, Lutz, 2002. "Unobservable effects in structural models of business performance," SFB 373 Discussion Papers 2002,22, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    11. Naufel J. Vilcassim & Vrinda Kadiyali & Pradeep K. Chintagunta, 1999. "Investigating Dynamic Multifirm Market Interactions in Price and Advertising," Management Science, INFORMS, vol. 45(4), pages 499-518, April.
    12. Jan-Benedict E. M. Steenkamp & Eric (Er) Fang, 2011. "The Impact of Economic Contractions on the Effectiveness of R&D and Advertising: Evidence from U.S. Companies Spanning Three Decades," Marketing Science, INFORMS, vol. 30(4), pages 628-645, July.

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