Promotions as Coopetition in the Soft Drink Industry

By Meade, William K., II; Hyman, Michael R. et al. | Academy of Marketing Studies Journal, January 2009 | Go to article overview

Promotions as Coopetition in the Soft Drink Industry


Meade, William K., II, Hyman, Michael R., Blank, Larry, Academy of Marketing Studies Journal


INTRODUCTION

Interdependence with complete conflicts of interest epitomizes competition (Moorthy 1985); interdependence with partial conflicts of interest warps competition. Partial conflicts of interest can create cooperative incentives among rivals and thus foster implicit coalitions (Fader and Hauser 1988), which may obstruct competition and produce asymmetric, nested, and tangled hierarchies of interdependence. For example, implicit coalitions in oligopolies allow covert cooperation to become nested within overt competition (Fader and Hauser 1988). In other words, the subtle intertwining of cooperation and competition, a.k.a. coopetition, reflects a kinship between seeming opposites (Brandenburger and Nalebuff 1996; Hamel, Doz, and Prahald 1989; Telser 1985).

Marketing scholars have applied the mathematical (Kinberg, Rao, and Shakun 1974; Lal 1990a, b; Narasimhan 1988; Raju, Srinivasan, and Lal 1990; Rao 1991) and tournament (Fader and Hauser 1988; Griffith and Rust 1997) literatures in game theory to their studies of promotion behavior. Their brand interdependence publications are so called because brand preferences are viewed as an external mechanism that imposes interdependence. Often regarded as "tangled beyond hope of analysis" (Baumol, quoted in Dolan 1981), interdependence is often ignored or assumed away by economists. Nonetheless, the complexities of real markets overwhelm simplifying assumptions about rational actors and expected utility (Dolan 1981). Game theory captures these complexities and uses them to explain price promotion.

The brand interdependence approach recognizes that the market disorder (relative to perfect competition) caused by brand preferences divides competitors into insiders/strong rivals and outsiders/weak rivals; alternatively, per the economics literature, dominant competitors and fringe competitors. Analogous to the use of perfect competition in normative pricing models, market disorder in brand interdependence models is used to explain the promotion behaviors of strong rivals. In such disordered cases, profits extracted by insiders from an implicit coalition can be as high as those achieved by explicit collusion (Lal 1990a).

To show that coopetition can exist among producers of consumer non-durables, we use soft drink scanner data to examine (1) rotation patterns of promotions among competitors, and (2) competitive draw. Our exposition proceeds as follows. First, we provide overviews of the game theory and brand interdependence literatures, as well as the soft drink industry and its promotions. Second, we compare promotion patterns and frequency to promotion forecasts. Third, we analyze relative market share and competitive draw. Finally, to show that coopetition exists in this market, we answer the following three questions: (1) Do strong bottlers alternate or rotate their promotions? (2) Is there competitive parity among strong bottlers and an asymmetry between strong and weak bottlers? (3) Do strong bottlers benefit from asymmetric competitive draw? Although single-source data has been used to study the third question, we augment this data type with institutional information, i.e., we study cross-promotion effects that include all merchandising rather than simply price, advertising, or display.

GAME THEORY AND BRAND INTERDEPENDENCE LITERATURES

The central question in promotion research is why companies price promote rather than change prices permanently (Blattberg and Neslin 1990; Lal 1990b). Standard ad hoc answers, such as stimulating trial, rewarding loyal users, weakening loyalty to competitors, and the like, are insufficient because they are temporally myopic and ignore general equilibrium constraints (Holland, Holyoak, Nisbett, and Thagard 1986).

Perhaps the most common competition-based explanation for promotions is the one-shot, or finite-horizon, prisoner's dilemma (Blattberg and Neslin 1990). The essence of the prisoner's dilemma is the contradiction between players' individual and joint interests (Fader and Hauser 1988). …

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