Modeling cross-price effects on inter-category dynamics: The case of three computing platforms

Existing research on the market evolution model focused on new product sales growth for a single product category. Accordingly, this approach did not imply any interactions among separate but related product categories that could affect each other's market growth. However, the importance of analyzing these inter-category relationships is emphasized because such an analysis helps managers to better understand the underlying market dynamics and develop more profitable product-line strategies for a multi-product market. The current study suggests a sales growth model that can be used to analyze the inter-category product relationships and forecast sales of these related products. The authors develop a simultaneous equation model that incorporates the cross-price effects on inter-category dynamics for technological product markets. It deals with the price effect of one product category on the market size of other categories that serve similar customer utilities. The model is empirically tested based on the sales and price data of three computing platforms – mainframe, mini, and micro computers, which dynamically interact within the broader ‘computing’ market. The results show that the sales of a given category of computing platform are significantly affected by the price of the category itself and by that of the related categories as well. The model is validated by comparing it with its alternative model specifications of similar purpose based on several established model comparison criteria. Managerial implications, contributions, and limitations of the model are also discussed.