Competitive Market Structure Analysis: Principal Partitioning of Revealed Substitutabilities

Abstract

In this paper, Competitive Market Structure Analysis (CMSA) is introduced. The approach is based on a behavioral model of revealed consumer substitution and utilizes principal component analysis of revealed substitutabilities to identify groups of competing brands or products in a market. The proposed partitioning criterion, the Index of Revealed Substitutability (IRS), yields estimates of the degrees of competition between all pairs of items in a market through use of household interpurchase times. The proposed partitioning methodology, Principal Partitioning (PP), identifies groups of competing items through the use of principal component analysis of IRS values. Through combination of the partitioning criterion measure and methodology, competitive market structures are analytically identified.