Judgmental forecasts in a competitive environment: Rational vs. adaptive expectations

In a competitive environment, judgmental forecasts or expectations affect not only a firm’s own decisions but also those of its competitors. They also influence ultimate market outcomes which, in turn, are then used to form new forecasts. In this paper, the authors use data from a simulated competitive marketing environment to examine the expectations formation process for key micro variables of interest to marketing managers. These include market size, number of competing products, and average industry price. In particular, the authors test two alternative hypotheses-rational and adaptive expectations- that are used to study how effective and efficient managers are in using information to form forecasts. They find no support for adaptive expectations, but partial support for rational expectations in that decision makers’ forecasts tend to be efficient but biased. The authors discuss the implications of the present results for both the relationship between industry competitiveness and forecast efficiency and for improving forecasts within a competitive setting.