Defensive Strategies And Consumers' Bounded Rationality: An Artificial Market Simulation

Twenty years after the Defender model, it is tempting to explore new ways of exposing defensive strategy recommendations to varying market conditions. This experiment analyses the consequences of changes in three factors: (1) a consumer population pursuing noncompensatory brand choice rules; (2) distinctive versus indistinctive (nonsegmented) preference structures; and (3) low versus high responsiveness to advertising. The consumers' response is simulated on an Artificial Consumer Market (ACM). The ACM assists in constructing the surface of the incumbent's profit function under a fixed-entry scenario and for experimentally varied market characteristics. The expected influences of consumers' noncompensatory choice rules on defensive strategy is clearly demonstrated. A defensive reaction by increasing the advertising budget is recommended for most of the market scenarios. A price reduction is required for all but one immature (nonsegmented) market. A price increase pushes the incumbent's profit in all except one of the distinct-preferences scenarios; quite remarkably, this most amazing of the original game-theoretic results from the Defender model receives new support from findings gained with the completely different methodology of agent-based simulation.