An Equilibrium Analysis of Defensive Response to Entry Using a Coupled Response Function Model

We determine the optimal response to competitive entry in a market characterized by a market share attraction model. The response of an incumbent is limited to changes in prices, advertising and distribution expenditures; brand positions are assumed to be fixed. We also assume that the entrant's position is chosen exogenously and that the sales potential of the market is constant.

After proving the existence of a unique Nash equilibrium, we show that the optimal response depends on the relative market share of the incumbents. The response by nondominant brands (with market shares less than 50%) mirrors the prediction by decoupled response function models—reduce price, advertising and distribution spending. For the dominant brand (having a market share of 50+%), the response is to reduce price and increase marketing spending. This finding explains previous empirical results that could not be addressed by the decoupled models.