The Formation of Key Marketing Variable Expectations and Their Impact on Firm Performance: Some Experimental Evidence

The expectation formation process has been extensively studied by economists, particularly for macroeconomic variables. However, no prior research has examined how expectations are formed and used in the context of marketing forecasting. In this paper, we use data from a simulated competitive environment (1) to examine the expectation formation process for important marketing variables such as market size, number of competing products, and average industry price, and (2) determine how inter-firm variation in the formation process affects performance. Using the Rational Expectations Hypothesis as a framework, we find that decision-makers' forecasts tend to be efficient, i.e., utilize all relevant available information, but are biased. Other key findings suggest that degree of firm rationality in the forecasting process as well as the level of forecasting accuracy are positively related to performance.