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Modeling the evolution of competitive market structure via competitive group dynamics

Amirali Kani (Department of Marketing and Consumer Studies, Lang School of Business and Economics, University of Guelph, Guelph, Canada)
Duncan K.H. Fong (Department of Marketing, Smeal College of Business, The Pennsylvania State University, University Park, Pennsylvania, USA)
Wayne S. DeSarbo (Department of Marketing, Smeal College of Business, The Pennsylvania State University, University Park, Pennsylvania, USA)

Journal of Modelling in Management

ISSN: 1746-5664

Article publication date: 5 May 2022

Issue publication date: 31 March 2023

116

Abstract

Purpose

This paper aims to examine the evolution of a competitive market structure over time through the lens of competitive group membership dynamics.

Design/methodology/approach

A new hidden Markov modeling approach is devised that accounts for the three sources of competitive heterogeneity involving managerial strategy, corporate performance and the impact of strategy on performance. In addition, some observed “entry” and “exit” states are considered to model firms’ entry into and exit from the market. The proposed model is illustrated with an investigation of the US banking industry based on a data set created from the COMPUSTAT database. This paper estimated the model within the Bayesian framework and devised a reversible jump Markov chain Monte Carlo estimation procedure to determine the number of latent competitive groups and uncover the characteristics of each group.

Findings

This paper shows that the US banking industry, contrary to the prior findings of having a relatively stable structure, has, in fact, gone through dramatic changes in the past number of decades.

Originality/value

Contrary to prior work that has primarily focused on managerial strategy to study market evolutions, the competitive groups perspective accounts for all three sources of intra-industry competitive heterogeneity. In addition, unlike prior research, the analysis is not limited to firms remaining in the panel of study for the entire observation period. Such limitation results in missing the various changes that occur in the competitive market structure because of the new entrants or the struggling firms that do not survive in the market.

Keywords

Citation

Kani, A., Fong, D.K.H. and S. DeSarbo, W. (2023), "Modeling the evolution of competitive market structure via competitive group dynamics", Journal of Modelling in Management, Vol. 18 No. 2, pp. 457-479. https://doi.org/10.1108/JM2-11-2020-0309

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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