1. Business Economics
Market Structure Analysis
An alternative to econometrics  Allows each brand to compete directly with some
Econometric analysis has deservedly acquired a brands but only partially with other brands
reputation of being one of the cornerstone analytical  Seamlessly integrates pricing, marketing spend,
tools in the field of marketing. Given good data, this distribution and competition between brands
technique is able to provide powerful insights on the  Does not require assumptions about a hierarchical
consumer response to price, promotions, and consumer purchase process
advertising (e.g. RoI) and to inform decisions on  Does not make assumptions about the degree of
pricing and promotional strategies, advertising switching
budgets, media mix, etc.
So, how does MktPro work?
However, when adequate data are not available for Each brand is regarded as a member of a set of
econometric analysis, the question arises – what brands with which it competes, to a greater or lesser
alternative approaches are available? Market Structure extent. The system will estimate the degree of
Analysis attempts to fill this gap by making estimates competition within this “partially-competing set”
of consumer responses from information about the automatically from price positions and distribution data.
brands or products competing in the market – including But, optionally, if direct information is available on the
their market shares, prices and marketing spends. competitive structure, then this can be overlaid or
substituted.
Market Structure Analysis
Market Structure Analysis is neither new nor
necessarily complicated. Indeed, the ad-sales ratio
(i.e. the ratio of advertising spend to sales revenue)
and Share-of-Market / Share of Voice analyses used
by many businesses to benchmark their advertising or
marketing spends can be regarded as simple forms of
Market Structure Analysis.
The diagram shows a map of a market in which each brand
competes to different degrees with the other brands in the category.
The key assumption (referred to as the “Darwinian
Hypothesis”) is that the brands or products within
each partially-competing set are assumed to be
distributed randomly about the optimum pricing and
spend points for the set in aggregate. Any brand that is
The chart shows Share of Market, Share of Voice and Ad-Sales ratio consistently a long way from the optimum for its
data for 10 competing brands. Benchmarking spends in this way
provides only a rough guide, because the analysis takes no account
partially-competing set will struggle to survive. This
of the different prices, brand strengths, distribution or competitive enables us to estimate the response of the brand in
positions of the competing brands. question to changes in its pricing or marketing spend,
and also to such changes by competitors.
A more sophisticated approach based on switching
theory was developed by the Hendry Corporation. This How can the approach be used?
provides estimates of switching and hence consumer
The Business Economics approach to market structure
response based on a number of assumptions. There
modelling is implemented as software that can be
are, however, limitations with this approach and, for
provided either as an Add-In to Microsoft Excel, or as a
this reason, Business Economics developed its own
DLL for integration into other software platforms.
innovative approach to Market Structure Analysis
(MktPro) that:
To find out more contact David Merrick at Business Economics Limited on 07714 456068 or david@BizEcon.com