Market Share Analysis with Brand Effect

Abstract

In this paper, we investigate the effect of brand in market competition. Specifically, we propose a variant Hotelling model where companies and customers are represented by points in an Euclidean space, with axes being product features. $N$ companies compete to maximize their own profits by optimally choosing their prices, while each customer in the market, when choosing sellers, considers the sum of product price, discrepancy between product feature and his preference, and a company's brand name, which is modeled by a function of its market area of the form $-\beta\cdot\text{(Market Area)}^q$, where $\beta$ captures the brand influence and $q$ captures how market share affects the brand. By varying the parameters $\beta$ and $q$, we derive existence results of Nash equilibrium and equilibrium market prices and shares. In particular, we prove that pure Nash equilibrium always exists when $q=0$ for markets with either one and two dominating features, and it always exists in a single dominating feature market when market affects brand name linearly, i.e., $q=1$. Moreover, we show that at equilibrium, a company's price is proportional to its market area over the competition intensity with its neighbors, a result that quantitatively reconciles the common belief of a company's pricing power. We also study an interesting "wipe out" phenomenon that only appears when $q>0$, which is similar to the "undercut" phenomenon in the Hotelling model, where companies may suddenly lose the entire market area with a small price increment. Our results offer novel insight into market pricing and positioning under competition with brand effect.