Assessing potential threats to incumbent brands: New product positioning under price competition in a multisegmented market

We present a model of competitive positioning and pricing of new products in a multisegmented market that is useful not only for new entrants, but also for brand managers of incumbents to assess the potential threats inherent in existing market structures. We do this for a multisegmented market in which the ideal point for each segment is located in a multidimensional discrete-attribute space with fixed demands at a given point in time. Firms launch new products sequentially at positions in this attribute space, incurring fixed and variable costs, and then decide on their product prices. Each firm acts to maximize its profit. We allow free entry, regardless of whether or not an entry location is occupied by an incumbent, and the position and price of a firm's product determine its market share. The number of firms that can make a profit in the market is determined endogenously, and the model determines the number of survivors. Free and endogenous entry removes from the brand manager the need to evaluate millions of potential entry threats from combinations of new products and possible positions. Instead, the methods developed here determine a much smaller set of threats that need to be considered. We adopt from the facility-location literature another equilibrium concept, the stable set, and relate it to the Nash equilibrium. Location decisions are stable, if, and only if, the entrants make a profit (viability) and the non-entrants cannot find any location such that their profit after entry is non-negative (survival). We design a heuristic algorithm based on genetic algorithms to empirically obtain the Nash equilibrium. The illustration involves the prospect of new brands attempting to enter the established liquid detergent market. Using aggregated share data from heavy user and light user segments, we model the segment-level market share as a function of distance from segment-specific ideal points, with segment-specific price sensitivities. We use segment-level shares to locate heavy and light user ideal points in a product-positioning space derived from Consumer Reports ratings of the real brands. The results show that the only open position for successful entry matches the effectiveness of Tide (the market leader) in removing stains, and lowers costs (and price) by sacrificing on the other attribute in the space. The reduced price appeals to the heavy user segment, leading to profitable entry. This position for entry remains profitable even if Tide opportunistically relocates. (c) 2005 Elsevier B.V All rights reserved.