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Proactive and Reactive Product Line Strategies: Asymmetries Between Market Leaders and Followers

Mays Business School, Texas A&M University, College Station, Texas
vshankar{at}mays.tamu.edu

To what extent do firms engage in product line actions simultaneously with actions in other marketing variables? What are the determinants of product line actions? To what extent are product line actions proactive? To what degree are they reactive? How can a firm’s product line action elasticity (percent change in product line length with respect to percent change in competitor’s past and anticipated actions) be decomposed into reaction and anticipation elasticities? Are product line actions and elasticities symmetric across market leaders and followers? To address these questions, we develop a conceptual framework comprising determinants of product line and other marketing actions in a single framework. We formulate hypotheses about the asymmetries between market leaders and followers regarding product line actions based on extended expectancy-valence and competitive demand elasticity theories. We develop a simultaneous equation model of demand and supply with product line and other marketing actions, which can be used to identify reaction and anticipation elasticities through the rational expectations approach. We estimate the model using data from the computer printer market comprising the market leader, Hewlett Packard (HP), and followers: Epson, Canon, and Lexmark. The results show that the market leader practices a product-proliferation strategy and rarely fights on price. In contrast, market followers adopt a price-fighting strategy. A firm is more likely to engage in product line actions when its competitors changed their product lines in the past, when the firm is large, and when its price is high. Product line reaction and anticipation elasticities are asymmetric between themselves and across the firms. For the market leader (followers), product line reaction elasticity is higher (lower) than product line anticipation elasticity. These differences are related to product line demand elasticities, which are higher for the market leader than they are for the followers.

Key Words: product development; innovation; competitive strategy; econometric models; reaction and anticipation elasticities
History: Received: February 23, 2005;