Extending the Rotterdam model to test hierarchical market structures

Two issues that have implications across a firm’s marketing activities are the estimation of the market response functions, and the determination of the structure of the market in which its products compete. In a recent paper, Clements and Selvanathan describe how the Rotterdam Demand System can be used to study these two issues in a joint framework. This note extends their model to test hierarchical market structures using data at the brand/form level. It also incorporates idiosyncratic response coefficients that capture the effects of advertising and/or other nonprice marketing mix variables separate from the effects of a price change. These extensions provide additional insights into the nature and extent of competition among brands within a product class.