The long-term challenge

Consumer products such as shampoo or tomato sauce are designed so that they appeal to consumers, encouraging them to buy those products. To that end, the industrial R&D organisation tends to focus on understanding and manipulating product attributes. However, buying behaviour is not only a function of the product: it is also, and in some cases perhaps more so, a function of the consumer, his/her social environment of other consumers, the competing products in the marketplace, and the brand marketing strategy. In order to design the best product, it is necessary to understand not just the physics and chemistry of the product, but also the psychology of consumers and the sociology of consumer groups or networks.

The goal of this study is to have a model of the marketplace that describes certain aspects of consumer buying behaviour. There are two main parts to such a model:

• A description of a population of consumers, who each choose (buy) repeatedly one of a number of competing brands (we can ignore the difference between product and brand for these purposes). This subdivides into a description of the behaviour of a single consumer (psychology), and the collective behaviour of a group, in other words of the interactions between consumers (sociology).
• A description of brand management, i.e. the strategy of brand managers when changing the attributes of a brand such as price or quality in response to events in the marketplace.

Traditional marketing models tend to focus on the second element, and treat the large number of consumers in a macroscopic, averaged way. Alternatively, one can look at individual consumers and their buying behaviour, and try to derive observable large scale effects, like changes in market share. Ideally one would like to connect the microscopic consumer viewpoint to the macroscopic viewpoint of the brand manager.

The short-term objective

The models which were looked at during the course of the Study Group were intended to shed light on:

• How a "decoy product" might influence the market. The appearance of a third product might significantly change the market shares of two others, while getting minimal sales itself. This effect is one of the most robust biases in consumer choice, and has been observed in product classes from chocolate bars to TV sets to beer. The decoy effect illustrates the importance of consumer psychology, of understanding how consumers perceive products, and how consumers judge quality prior to purchasing the product.
• The dynamics of market share: how sales of products can vary over time. For example, even if two products are equal in all relevant aspects, then after a long time of consumer activity it might be that each product takes 50% market share (preserving the symmetry), or one product takes nearly 100% market share (breaking the symmetry), or that there is no steady state, with market dominance alternating between the two brands. The second of these three cases is called "lock-in", corresponding to one brand obtaining a virtual monopoly, which is almost impossible to break.
• How a new product will fare, given its quality profile compared with existing brands. This question is complementary to that of the decoy, asking what market share a new product will gain rather than how it will affect the market shares of existing products.