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    AN EMPIRICAL POOLING APPROACH FOR ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA VENK ATRAM RAMASWAMY, WAYNE S. DESARBO, DAVID J. REIBSTEIN AND WILLIAM T. ROBINSON University of Michigan University of Michigan The Wharton School, University of Pennsytvania University of Michigan ‘The PIMS (Profit Impact of Marketing States) data ental sparse dme-seres observations for large numberof svategic busines unit (SBUs). In oder to estimate disapoepste marketing ‘mix elastics of demand, a natural solution ist poo! diferent SBUS. The waditional,a print fpproac iso pool together those SBUs which one believes in advance to be very smi with, ‘espect io their marketing mix elasticities. We propose an alternative maximum likelihood, latent pooling method for simultaneously poling. estimating, and testing linear regression model es Dircally. This method enables the determination of @“Yurzy” pooling scheme, while diectly ‘stimatinga set of marketing mis elasticities and interemporal covariances for each poo of SB ‘Our analyses reveal diferent magnitudes and patterns of marketing mix elastics forthe derives pools. Pool membership is influenced by demand characteris, business scope, and order of market entry (Beonamerie Models; Regression and Other Statistical Techniques; Marketing Mix; Competitive Strategy) 1. Introduction How does one estimate marketing mix elasticities when sales and marketing mix data are available for a large number of heterogeneous cross-sections, but the time-series for each cross-section is sparse? A good example of such a situation is the PIMS database which contains sales and marketing mix data for over 3,000 strategic business units (SBUs) for periods that range from only 2 to 12 years (Buzzell and Gale 1987). The simplest alternative is to resort to an aggregate pooling scheme wherein all the SBUs are pooled together. This assumes homogeneity in the structure of relationships across SBUs ‘and may be justified if one is only interested in aggregate-level estimates. However, it ccan be grossly misleading if considerable cross-sectional variation exists with respect to the magnitude and pattern of regression coefficients (ef. Bass et al, 1978; McCann 1974; Wittink 1977), Given the diverse nature of businesses comprising the PIMS database, it is reasonable to expect substantial cross-sectional heterogeneity with respect to the sales responsiveness to marketing mix variables. Some form of disageregate pooling is necessary since one 103 07322309/93/1201/0103801.25 ‘ia © 199, The ino Mammen Seno Opcns Ren Sy ef an 104 ‘V. RAMASWAMY, W. S. DESARBO, D. J, REIBSTEIN & W. T. ROBINSON cannot reliably estimate the marketing mix elasticities for each SBU separately, Even as the database grows in longevity, it is difficult to conduct time-series analyses separately for each SBU since the number of years of data for most businesses is still limited; about ‘90% of the SBUs have less than seven years of annual observations. One approach for disaggregate pooling commonly employed in practice is to pool together those SBUs which one believes in advance to be very similar with respect 10 their marketing mix elasticities (e.g., Hagerty et al, 1988). This a priori disaggregate pooling approach requires theoretical guidance to form the pools. For instance, Hagerty et al. (1988) classify a sample of 203 SBUs into 25 groups a priori, based on prespecified demand characteristics. They then estimate elasticities for cach group separately. However, 10 test whether these estimated group-level elasticities are indeed distinct, Chow tests (Chow 1960) must be conducted for different combinations of groups to determine the appropriate /evel of disaggregate pooling (Bass and Wittink 1975). This isa cumbersome task when the number of a priori pools is large. On the other hand, in the absence of theoretical guidance and/or relevant descriptive data for forming pools, there is little guidance in the statistical or marketing literature for pooling cross-sections (McCann. and Reibstein 1985), We propose an alternative empirical pooling approach when sparse time-series data are available for a large number of cross-sections. This approach entails a maximum, likelihood based, latent-pooling method for simultaneously pooling, estimating and testing linear regression models, Specific sets of regression coefficients and intertemporal co- variances are directly estimated for each derived pool. Statistical testing criteria are used ‘to determine the number of pools that fit the data adequately. Our approach may also be gainfully utilized for cross-sectional data with either a single observation, or when sufficient time-series data are available for each cross-section but only a few consecutive periods can be included because of major structural changes in market conditions. In the marketing mix elasticity application with PIMS data, pools of SBUs are derived without resorting to a priori pooling schemes. Hagerty et al. (1988) resort 10 a priori pooling with PIMS data, since “the pooling scheme cannot be developed empirically, the data are simply to0 sparse” (p. 3). We utilize PIMS data to demonstrate how pools of SBUs can be developed empirically. Subsequently, the derived pools are diagnosed ost hoc with respect to demand chatacteristics, business scope, and order of market entry. We discuss their impact upon pool membership and the estimated marketing mix elasticities 2. The Empirical Pooling Method J cross-sectional units; ; T time periods; s+ J predictor variables, period ¢5 Yi = the value of a metric criterion variable (e.., sales) for cross-section i in time period 1. ‘The classical, pooled, linear regression model is specified as Yu = Z Xb + ey a where 8; isthe regression coefficient for explanatory variable j, and ¢, is @ random dis- turbance term. This ageregate-level pooled regression model, where all the data (ie., 7 observations) are catenated, can also be expressed as ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 105 Y=XBit6 Q) where Y is an JT X 1 column vector containing values of the dependent variable, X is an JT x J matrix of explanatory variables, 8, is a JX 1 column vector of aggregate-level parameters, and « is an JT X 1 column vector of random disturbances. The pooled regression model in (2) implies a common parameter vector for all the cross-sections, To capture the unobserved cross-sectional heterogeneity in parameter vec- tors, one can specify a model at the disageregate level via multiple pools of cross-sections and estimate parameter vectors for each pool. One approach would be to form these multiple pools a priori, although this has limitations as indicated earlier. Alternatively, we attempt to form multiple pools empirically while estimating regression coefficients for each pool simultaneously, according to some objective (data-driven) cri- teria, Hence, we posit the existence of K “latent” pools such that the structural relation ‘within each pool is described by a pool-specific parameter vector; these parameter vectors will typically vary across the K pools so as to capture the unobserved cross-sectional heterogeneity in the data, The potential space of parameter variation is characterized by these latent pools along with the membership probability of each cross-sectional unit into each of these latent pools, The empirical derivation of the number of pools, pool membership of cross-sections, and the parameter vectors for each pool, are discussed in the next section. Formally, we postulate that the metric dependent vector ¥) = {Yis, ..- Yirl'is dis. tributed as a finite mixture of K conditional multivariate normal densities: Ys ~ Gis BAY = E was Wil Bes Beds @) where SVX: Bas Be) = (2x )-7? Aa exp(— }(¥s — XB) Ae'Ws ~ XiB)}, (4) ‘and the w= (wi, +, ¥x-1) are K~ I independent mixing proportions such that O af IX By 8). 0) Given Y, X, and a value of K, we need to estimate the following free parameters: the K’ ~ | mixing proportions w = (WH1, ..., we-1), the coeflicients 8 = (8), ..., Bx)’, and the variance-covariance matrices A = (Aj, ..., Ax)’ so as to maximize the likelihood L (or equivalently In L), subject to the conditions specified in (5) and (6). Note, Ay ‘must be a positive definite, symmetric matrix in order to obtain consistent estimates of the parameters 8. 3. An EM Framework ‘We discuss the implementation of a maximum likelihood procedure utilizing an EM type estimation framework (see Dempster et al. 1977; Dillon and Mulani 1989; Malhotra ' Utixng patterned error structure has the advantage of being able to accommodate cross-sections with ier numbers of data pois. However, this rises the question of how one should go about cheating a specifi ype of autocorelated error structure is conceivable that diferent groups of erossections may etal ‘ferent er patterns. ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 107 1987). In order to present an EM formulation in the present context, we introduce nonobserved data via the indicator function: iff cross-section i belongs to pool k, = 0. otherwise. (oy ‘The column vector 2; is defined as (Z;1, 2)’, and the matrix Z = (2), ..., 2). We assume that for a particular cross-section i, the nonobserved data 2, are independently and identically multinomially distributed with probabilities w. The joint likelihood of Y, and z, (ie., the “complete” data) is LAY, 43 Xs BAW) = TE Le fV IX, Bes Bed ay Note that LAY,5 Xi, B, A, w) = D Dwef(VelXss Bes As)) InL=Zhn [z WW IX Bry ao] which is consistent with expression (9), From (11), the complete in likelihood over all cross-sections is In Le= DY zaln(S(V,|¥i, Be, Av) + DD zueln we. (12) With the matrix Z. considered as missing data, the EM algorithm here amounts to iter~ atively alternating between an E-step (a conditional expectation step) and an M-step (a ‘maximization step) In the E-step, the expectation of In Lis evaluated over the conditional distribution of the nonobserved data Z, given the observed data Y, explanatory variables X, and provisional estimates (w*, 8*, and A*) of the parameters w, 6, and A respectively. This expectation is E, (In LX, w= w*, B= 6%, A= A") = DDE (eur X,, wt, 8%, A*1Y,) in (VX, T, AT)) + DDE (zu: Xi,wt 6% ALY) in wh (3) ‘Using Bayes’ rule and Expression (11), the conditional expectation of za can be computed as E (zai Xi, wt, BY, A*1Y,) 011K. 88 at) |(E whe. 1x,.AF, 8D). a4) which is identical to the posterior probability Px defined in (7). Consequently, E (2a; Xs, w*, 8, AMY.) = Ph, «sy ‘where P%, denotes the posterior probability evaluated with provisional estimates w*, 6* and A*2 Thus, in the E-step, the nonobserved discrete data Z are replaced by the posterior probabilities computed on the basis of provisional parameter estimates, and (13) becomes. 108, \V. RAMASWAMY, W. S, DESARBO, D. J. REIBSTEIN & W. T. ROBINSON E,(InLsX,w=w*,8= 6% A= At) = DD Phin(¥IX, BE, AI + DT Phinwh. (16) 7 x In the M-step, E, (In L-; X, w= w*, 8 = B*, A = A*) is maximized with respect to w, B and A (subject to constraints (5) and (6)) in order to obtain revised parameter estimates. These revised estimates are then used in the subsequent E-step to compute new estimates of the nonobserved data Z. The new estimate of 7. is used in the subsequent M-step to arrive at new estimates of the parameters w, 8 and A. The E-step and the M- step are successively applied until no further improvement in the In-likelihaod function, is possible based on a specified convergence criterion, Details of the M-step are provided in Appendix A. The M-step involves the familiar form of the likelihood equations in exponential families, while the E-step is a consequence of the “missing” data, Z. From Appendix A, we can obtain the following closed-form analytic expressions for the parameter estimates 6, and Ag, using the respective likelihood equations b [z prexscatyxy] [3 mexicarvp), a7 Ay [= Pic.- XEN - xt] (gy ‘These expressions are intuitively appealing as they suggest that the within-pool parameter estimates are equivalent to weighted generalized least-squares estimates with the posterior probabilities /;; a5 weights. Note that if we set K = | and estimate an aggregate pooled regression model in this framework, we get Be = (XEEXIURT, where #7! is a block-diagonal matrix of dimension JT x IT with J blocks (47), each with dimension 7 T-. Hence, we obtain the GLS estimator in the aggregate case wherein the disturbances are correlated within each cross-section. This is akin to variance-com- ponent aggregate pooling with A;' being the inverse of an arbitrary intertemporal matrix for each cross-section (cf, Bass and Wittink 1975, Maddala 1971, Moriarty 1975). Hence, in the E-step, we estimate Py and in the M-step, we estimate w, A, and 8. For specified initial values of these parameters, the conditional expectation (E-step) and the maximization phases (M-step) are alternated until convergence of a sequence of In- likelihood values is obtained.* Upon convergence of the proposed algorithm fora specific number of pools K, we obtain final estimates of the pool proportions w, pool-specific parameter vectors f, and variance-covariance matrices A. The Cramer-Rao bound for "Y), «9) 2 The estimation program has thre options with respect to start values, These inctude random starts generated by the progam via uniform distebuions use-speciied stants input ioctl othe program, and rational tas based on a (K-means like) quck-clustering procedure of the individual-level repression cocfients where there «xis suicient degrees of freedom), » Dempster, Laid and Rubin (1977) provide a proof using Jensen's inequality that in ineeases mono- tonicaly, so that convergence 1 atleast a Jealy optimum saution can be proven using limiting sums argument Boyes (1983) and Wu (1983) provide a iscuson ofthe comsersence properis ofthe EM algaritm, * Unlike finite mixtures of other types of density functions, the parameters of ite mixtures of normal densities ac typically ented (se Teicher 1961, 1963; Vakowitz and Spagine 196; Yakowitz 1970), lthough problems ‘an aise the within‘po! covariance matrices approach singularity, In aditin, locally optimum Solutions ‘an plague such (and all) nonlinear models, especially with small sample sizes and lle separation ofthe ‘centoids ofthe component distrlbutions (ef Titterington, Smith ané Makov 1985). Dads and Hat (1973) and Hosmer (1973, 1974) have shown that such numerical dficulis iminsh wih larger sample sizes and reasonably separated disibutions. ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 109 the variance of the estimators is obtained via the negative inverse of the expectation of the Hessian matrix, which yields standard errors for all the free parameters. 3.2. Model Selection In order to determine the number of pools (the value of K), the estimation procedure ‘must be run for varying numbers of pools. Bozdogan and Sclove (1984) propose using, Akaike’s (1974) Information Criterion (AIC) for choosing the number of groups in mixture models. Accordingly, one would select K to minimize AlCy = -2 In L + 2Nx, (20) where Nx is the number of free parameters (in the full model): Ng = (K~ 1) + JK+KT(T+1)/2, an ‘given no additional restrictions on any of the parameters, Koehler and Murphree (1988) suggest the use of the Schwarz (1978) Bayesian Information Criterion (BIC) due to the problems associated with the AIC tending to select over-specified models (i.e., K 100 large). This is given by BIC, = ~2 In L + Ne(in IT). (22) For empirical applications involving large samples, Bozdogan (1987) proposes the use of the CAIC (consistent AIC) as a heuristic which penalizes overparameterization more strongly than the AIC or BIC. The CAIC statistic is computed as AIC, = ~2 In L + Ng(In IT + 1), (23) Note, the AIC, BIC and CAIC measures, like other goodness-of-fit statistics, are heuristics for model selection. In addition to these statistics, we propose an entropy-based measure 10 assess the degree of fuzziness in pool membership (when K> 1), based on the posterior probabilities Ex ~[pB- rem re|/aink. (2s) xis a relative measure that is bounded between 0 and 1. Given K pools, Ex = 0 when all the posterior probabilities are equal for each cross-section (maximum entropy). A value of Ex very close to 2er0 is cause for concer as it implies that the centroids of the conditional parametric distributions are not sufficiently well separated for the particular ‘number of pools that have been estimated. Empirical Application ‘The PIMS database has been extensively utilized by marketing and strategic manage ment researchers. Most of the research has focused on the inter-relationships between environment characteristics, competitive strategy, and business performance (cf. Buzzell and Gale 1987). One of the major strengths of the PIMS database is that it contains SBUs that exhibit considerable diversity in business/market characteristics. However, ‘modelers have to first contend with the limited availability of time-series for each SBU. We focus on the estimation of elasticities of demand for businesses in the PIMS database. 4.1. Estimating Elasticities Hagerty et al. (1988) adopt a multiplicative sales response model for estimating elas- ticities. The log-linearized form is log Y= log Bos + Bis log Xp + ty (28) 10 \V. RAMASWAMY, W. 8. DESARBO, D. J. REIBSTEIN & W. T; ROBINSON where ¥; is the unit sales for SBU i in year ¢, and X,, i the value of explanatory variable J for SBU / in year /. The explanatory variables include a market size variable and five ‘marketing mix variables: quality, price, media advertising, sales promotion and salesforce expenditures. Hence, the six aggregate elasticities Bia, ..., Bex relate to quality, price, advertising, promotion, salesforee and market size respectively. As Hagerty etal. (1988, . 2) note, “the elasticities are ‘net’ elasticities in that they reflect the effect ofthe SBU's ‘marketing spending on physical quantity of sales net of the effects due 10 competitive response.” The inclusion of the market size variable “helps prevent distortion of elasticities by factors that have nothing to do with marketing effort (p. 4).” All marketing expen- ditures are deflated by a price index. Appendix B provides definitions fora the relevant variables and measures (taken from Hagerty et al. 1988) Even the estimation of these aggregate elasticities is problematic with PIMS data since ‘the observations are disguised for each SBU. Specifically, each of the variables (Yi and Xx.) are multiplied by an arbitrary constant that is specific to each SBU. The same “disguise factor” is used by a particular SBU for al ts observations. Hagerty tal. (1988) show that the effect of the “disguise factor” is to merely introduce an idiosyncratic intercept cffect without affecting the elasticities. Hence, they propose using SBU-specific intercept terms to control for the PIMS disguise factors. The aggregate model specification in (25) is therefore modified as log Yu = Dai + D Bis log Xp + cus (26) where U; is a dummy variable for SBU i, and c; is the idiosyncratic intercept for SBU i. However, iti practically infeasible to estimate a large number of SBU-specific intercepts for large samples given degrees-of-freedom issues and the modest computational and storage capabilities of most current computers. Hagerty et al. (1988) obtain “ageregate- level” estimates by defining 25 pools a priori according to pre-specified demand criteria, and then computing 2 weighted average of the OLS estimates of group-level elasticities There is however, a much easier alternative if only aggregate-evel estimates are desired, If we mean-center the log-transformed data, we can directly estimate aggregate-evel elasticities via a pooled regression mode! (i.e. using all the data), without having 10 estimate idiosyncratic SBU intercepts or having to develop a priori pooling schemes. Let U=[U;,..., Us], where U; is a dummy variable column vector indicating SBU i; the respective SBU-specific intercepts ¢; simultaneously control for the SBUs disguise factors. ‘The OLS ageregate-level elasticities are given by By = (X’MX)"'X’MY, where X and Y represent the log-transformed disguised data, and M = I~ U(U'U)"'U’ is an idem- potent block-diagonal matrix. Each diagonal block of M is M* = Ir—(1p1';)/T, where Ipisa TX T identity matrix and 17 is a column vector of ones. Note that M* simply ‘mean-centers the observations within each SBU. In other words, one need not explicitly estimate idiosyncratic SBU intercepts in order to obtain aggregate-level estimates of elas- ticities which are corrected for the disguise factors. Note, although no intercept term is estimated directly, it is possible to recover the idiosyncratic intercepts if desired (cf. Greene 1990) While the assumption of homogeneity in customer response to marketing mix variables may be invoked if only aggregate-level elasticities are desired, some form of disaggrevate __ Pooling remains necessary to reveal any potential differences in elasticities across SBUs, In this regard, the approach taken by Hagerty et al, (1988) is an example of an a priori disaggregate pooling approach which requires prior specification of relevant theoretical criteria to form the discrete pools. The validity of this type of approach depends upon the extent to which the a priori pooling criteria relate to differences in elasticities across SBUs. Ensuring homogeneity in the estimated regression parameters within each a priori ool may be difficult. Moreover, formally determining the appropriate level of disagare- ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA un gation involves a laborious task of conducting pooling tests for various levels of pooling, In contrast, our proposed latent-pooling method does not require the formation of a priori pools in order to obtain disaggregate estimates of elasticities. It offers a convenient way of simultaneously pooling, estimating and testing linear regression models directly from the sales and marketing mix data, Hence, we refer to this method as an empirical disaggregate pooling approach. 42. Data Sample The data covers $48 SBUs drawn from the PIMS annual database. These 548 SBUs contributed data during the time frame 1975-1979, We restrict ourselves to a specific time frame since we wish to estimate a general variance-covariance structure (A) which renders meaningful intertemporal relationships. Using observations from different years ‘could potentially confound major structural shifts in business-market conditions with cross-sectional heterogeneity. However, a problem arises in the estimation of a general variance-covariance structure. As discussed previously, a mean-centering transformation of the data removes the effect of the PIMS disguise factor in estimating elasticities of demand. Since the data are mean-cemtered, Ay itself is not estimable, but rather, the transformed matrix S = M*A,M"*, where M* = Ip — T~'(1y1), is the mean-centering ‘transformation for any SBU, 17-is an identity matrix, and 1,-is a column vector of ones. The variance-covariance matrix Ay is easily recovered from an estimate of S. However, the variance-covariance matrix 4, becomes singular (with rank T — 1) as a result of the mean-centering transformation.‘ Kiefer (1980) recommends using the (7 — 1) X (T~ 1) fall rank submatrix of S obtained by deleting the last row and column from 'S. Using this generalized inverse is tantamount to deleting the last observation from the 'mean-centered data for each SBU and then applying the estimation procedure for the remaining subsample. Hence, our empirical pooling results, to be discussed shortly, ef fectively entail 2192 observations for 548 SBUs from the PIMS database. 43. Aggregate Estimates Table 1 provides aggregate estimates for the GLS (K = 1) case using a generalized variance-covariance structure, as well as OLS estimates obtained by setting Ay = o°T, In the OLS case, only a single variance term ? is estimated, while our K = | case involves T(T + 1)/2 variance-covariance terms. In the OLS case, the In likelihood equivalent is ~3875.81; the corresponding values of AIC, BIC, and CAIC are 7765.62, 7805.47, and ‘7812.47 respectively. The In likelihood for the GLS (K = 1) case is ~3419.30; the cor responding values of AIC, BIC and CAIC are 6870.60, 6961.68 and 6977.68 respectively. Hence, the GLS (K = 1) model has a better fit than the OLS model since the AIC, BIC, and CAIC values are much lower than those for the OLS model, From Table 1, looking along the diagonal of the intertemporal variance-covariance ‘matrix for the K'= 1 (GLS) case, note that the variances are heteroskedastic over time periods. The OLS estimates are based on the assumption of constant variance in each ‘time period (the equivalent maximum likelihood estimate of the variance term in the OLS case is 0.020). Further, the OLS model assumes that the intertemporal covariances are zero. However, from the estimated GLS variance-covariance matrix in Table I, it is . evident that there is time-dependence in the data. In particular, the correlations (from the lower triangular half of the matrix) indicate that the disturbances are positively cor- related with each other. Notice that the correlation between a given time-period and other time-periods decrease over time. Hence, the intertemporal variance-covariance “tn general, this is a problem that plagues the estimation ofall fed eects models for cross-sectional time- series data with arbiary intertemporal covariances (ef. Kiefer 1980). 2 \V. RAMASWAMY, W. S. DESAREO, D, J, REIBSTEIN & W. T. ROBINSON ‘TABLE | Avgregte Blsticty Estimates Variable Quality Price Advertsing Promotion Salesforce Market Size Aggregate GLS Model (Ket o. 1211 000s 0016 0.sh 04 (Soares CRATINN —(1.822)" (730 (BABS 2.508) Estimated GLS Variance-Covaranoe Matrix’ 1 2 3 4 1 0.086 0080 086 0082 ae 2 oss 0079 ‘0.083 082 3 ora oss outs os 4 0836 om. 0.908 018 Aswregate OLS Regression: oss n1168 0.006 0016 on 0.686 Guia C7s23e (1525) G.IVRII GEIR) 29.096)" Eaimated OLS Variance: o? = 0.026 * Values in parentheses are tats forthe respective elasticity estimates. The off-diagonal elements in the lowe wiangularbalf re replaced by he respective conelations p= 0.0, p= 0.05, stp = 001. pattern suggests the presence of both increasing heteroskedasticity (in error variances) and serial autocorrelation for these data. ‘The magnitudes of the elasticities for the GLS and OLS estimates are quite similar, except for the quality elasticity which is relatively larger in the OLS case. Because the ‘number of cross-sections is large, the impact of the intertemporal dependence on the estimated elasticities is mitigated. Hagerty et al. (1988) report “aggregate-level” estimates by computing a weighted mean of elasticities across their 25 a priori, group-level OLS regressions (about 50 observations per group). In contrast, our direct aggrezate-evel estimates (GLS and OLS) are based on all the data.’ Since our results are based on @ different sample of SBUs and time periods, itis not entirely appropriate to compare our _aggregate-level results with those reported by Hagerty et al. (1988). Nonetheless, as one might expect, our aggregate-level estimates seem to have much lower standard errors, and consequently much larger values. All the ageregate-level marketing mix elasticities are significant as shown in Table 1. 44, Disaggregate Estimates We applied our empirical pooling approach for a varying number of pools K. The “resulting In-likelihood values, number of free parameters, AIC, BIC and CAIC values are shown in Table 2. As is evident from Table 2, AIC, BIC and CAIC are al! minimized * Hagerty etal. (1988) report the folowing mean “agaezatelevel” elasticities (statisies) computed across ‘thei 25 pools for quality, price, advertising, promotion, slesorce and market size, respectively: 0.344 (128), 0.985 (205), 0.003 (0.71), 0008 (1.28), 0.30 (3.27), 0:25 (326). ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 113 Model Bice CAICe Aczraate (k= 1) 3419.30 6 6870.60 6961.68 ors ‘Two pools w=?) 2869.51 3 s90s.02 5990.87 0587 ‘Three pools k=3) 2706.53 % $813.06 5797.69 5447.69 Four pools «4 2598.47 6 sasog4" sna srgastee Five pools Kes) 2581.96 & s3aa.s2 5821.70 5905.70 + Minimum AIC. 2° Minimum BIC. ‘= Minimum CAIC for K = 4 latent-pools (AIC = 5330.94, BIC = $712.34, CAIC = 5779,35).° This suggests that four latent-pools adequately describe the data. Given potential problems associated with locally optimum solutions, we generated five alternative K = 4 solutions using different random starting values. The In likelihood values for all these solutions were within one percent of the solution reported in this Paper. The correlations of the estimated elasticity vectors for each pair of runs were also ‘computed. The ten pairwise correlations were 0.99, 0.96, 0.89, 0.94, 0.98, 0.99, 0.94, 0.97, 0.94, and 0.99, lending credence to the reported elasticity estimates, Although severe multicollincarity can potentially distort the elasticity estimates for each pool, this, does not appear to arise in this application. Thisis because the determinant of the aggregate correlation matrix is 0.85 (0.87, 0.52, 0.86, and 0.67 for the four pools) and the condition number is 1.47 (1.40, 2.04, 1.42, and 1.90 for the four pools). Further, the derived ‘marketing mix elasticites tend to have the expected sign and are statistically significant. ‘The entropic measure Fis 0.62 suggesting some degree of fuzziness in the pool mem- bership of SBUs. The mean modal posterior probability is 0.80 and over 70% of the ‘SBUs have modal posterior probabilities greater than 0.70. ‘Table 3 presents the estimates of the elasticities (f,) for each of the four latent-pools derived empirically. The proportion of SBUs in these four pools (1,) are 26.6%, 7.8%, 38.2% and 27.4% respectively. Comparing each of the within-pool elasticity vectors in Table 3 with the aggregate (GLS) elasticity vector in Table | reveals several distinguishing characteristics which are used to label each pool Pool 2 (7.8%) and pool 3 (38.2%) have relatively smaller market size elasticities, while pool 1 (26.6%) and pool 4 (27.4%) have relatively larger market size elasticities. The market size variable is essentially a covariate which separates the components of a SBU’s sales due to market expansion from that of its own marketing effort. When the market size clasticity is small, a business should be more dependent upon its own efforts to build sales, This is consistent with the observed pattern of marketing mix elasticities for pools 2 and 3. In particular, the sales for businesses in pool 2 and pool 3 are very elastic to + salesforce expenditures, with salesforce elasticities of 0.568 and 0.556 respectively. Pool 2also has a much bigger quality elasticity of 0.611, a small promotion elasticity of 0.131, and a relatively smaller price elasticity of -0.761 (not significant at the 0.10 level). Hence, while customers in pool 3 (labeled salesforce sensitive) are very responsive to personal selling and distribution effort, customers in pool 2 (labeled quality/ salesforce A traditional likelihood ratio test would alto point tothe K = 4 solution. na \V. RAMASWAMY, W, S. DESARBO, D. J. REIBSTEIN & W. T. ROBINSON TABLE 3 Disagaregate Elasticity Esimats fram Empirical Pooling Variable Poot Label (Semple Percentage) Quality Price __Advertsing Promotion Salesforce _ Market Size Price Sensitive ome 2012 oo 0.007072 (060%) aise (T9209 (0373) (412) (OAT) OTA Quality Salesforce Sensitive ost 0.761 0009 031 0568 0.308 38) ze C119) (ORs) agree C2372 (4212 Salesforce Sensitive 0098 = 1058, 0008 0.005056 a (6824) Gry Crome 78g 1.248) OLAS) (7.540) Industry Standard 0156 = 0.984 oor = oom ams 0800 74%) G.7Iee CARA (0502) 1.243) G.I (55.905) * Values in parentheses are (statisti of the indicated elasticity eximates significance tests are two-tailed. #75010 sp =005, op = 00, sensitive) are also very sensitive to changes in product quality and are relatively less ‘sensitive to changes in price.’ Businesses in pool | and pool 4 seem to rely less on their ‘own efforts to build sales. Customers served by businesses in pool | (abeled price sensitive) are very price elastic, although not at the expense of quality. In pool 4 (labeled industry standard), the marketing mix elasticities are somewhat lower than the aggregate estimates, and are all in a relatively middle range. Thus, there exists considerable variation in the ‘magnitude and pattern of quality, price, promotion, salesforce and market size elasticities across the four derived pools. The aggregate-level estimates discussed previously “mask” this heterogeneity in elasticities. From Table 3, the price elasticities have larger absolute magnitudes and range from 0.761 to -2.012 across the four pools. Tellis (1988), in a meta-analysis of price clas- ticities, reports a mean of —1.76 with a mode of —1.5 (The mean was about ~2.5 after ‘correcting for method-induced biases.) Hanssens et al. (1990, p. 191) note that “industry price elasticities are typically less than I in absolute magnitude, whereas brand price elasticities are typically larger than 1 in absolute magnitude.” Because of product aggre gation at the SBU level, the absolute magnitudes of the elasticity estimates will typically be lower than those estimated at the brand level. The advertising and promotion elasticities are relatively small in magnitude across the four pools (the largest advertising elasticity is 0.009, while the largest promotion elasticity is 0.131). Previous empirical studies and ‘meta-analyses of elasticities of selective demand reveal that the advertising elasticity for brands is positive and small, probably on the order of 0.10 (Aaker and Carman 1982; ‘Assmus et al, 1984; Leone and Schultz 1980). Our estimated advertising elasticities are smaller in magnitude, although in addition to product aggregation, it must be noted that these are based on annual time-series observations. Given both product and temporal aggregation with PIMS data, the reported price and promotional elasticities are of a lower magnitude relative to typical brand-level elasticities estimated using weekly observations « for consumer packaged goods (cf. Bolton 1989). ‘There is litle empirical evidence, however, regarding salesforce and product quality elasticities (see Hanssens et al. 1990). From Table 3, the estimated salesforce elasticities exhibit polarized extremes with large (0.568 and 0.556) as well as small (0.006 and 7 Since the coefficient sizes fr the advertising elasticities are small and ess meanngfl, we ignore therm in the rest of the discassion inthis section, us TABLE 4 Esimated Within-Poo! Ineremporal Variance Covariance Matrces* 1 2 3 4 Pie Sensitive Poo! 1 ooze 0.008 0.029 003 2 08 0082 0s 0.050 3 702 892 061 0.087 4 sis 0.806 asia 0.089 1 2 3 4 Quality/Saestorce Sensitive Poo 1 0.136 0149 o.1se a6 2 osu 0196 oT 012 3 0.790 0.792 283 0204 4 0.869 0620 0301 0350 2 3 ‘ Salesforce Sensitive Poot 1 016 oars oor 0.09 2 nas 0.026 027 023 3 0549 gat 0039 0.040 ‘ 0382 0667 58 0u7 1 2 3 4 Industry Standard Pool 1 0.003 2.003 0.003 6.003 2 0683 0.007 007 0.008 3 0509 0.866 oon oo12 4 0458 0.786 0.908 01s "The off-iagonalclements in the lower triangular half are replaced by the respective corelaions. 0.075) magnitudes. The quality elasticity ranges from 0.098 to 0.611. Hagerty et al (1988) obtain mean elasticities of 0.304 and 0.344, for salesforce and quality, respectively. They note that Lambin’s (1976) “distribution” elasticities (which ranged from 0.15 to 0.59) may be similar to salesforce elasticities estimated with PIMS data. Idiosyncracies in the measurement of quality, however, makes it difficult to compare quality elasticities from different studies (e.g., Lambin 1970), The estimated intertemporal variance-covariance matrix, Ax, for each of the four pools are given in Table 4. Note that for each pool, we observe a variance-covariance structure that is somewhat similar to the aggregate (GLS) case discussed previously. However, there are differences between the four pools with respect to the magnitude of the estimated intertemporal variances and covariances. Thus, our method accommodates any general pattern of within-pool time dependence in the data (via the matrix A.) which can po- tentially affect the magnitudes of the estimated elas 4.5. Diagnosing the Pools In order to augment the interpretation of the derived empirical pooling results, we conduct post hoc analyses of the posterior probabilities of membership. Specifically. we estimate the following model, separately for each pool k: . Qu = E Zirben + vi, (n where Og = In (Py/P,.), and P;, = (1l,Px)'/* is the geometric mean of the posterior probabilities, Z,is the value of explanatory variable r for SBU i, 5,-is the impact coefficient 16 \V. RAMASWAMY, W, S. DESARBO, D. J. REIBSTEIN & W. T. ROBINSON for variable r for pool k, and vq is a random normal disturbance.' A list of the specific explanatory variables and their measures are given in Appendix C. Because our empirical pooling analysis was carried out across a wide cross-section of market environments using the SBU as the unit of analysis, we investigate three general aspects of the business / ‘market: demand characteristics, business scope, and order of market entry. We briefly discuss the rationale for choosing these explanatory variables. Demand Characteristics, Demand characteristics such as buyer search, purchase fre- ‘quency, stage of product life cycle (PLC), importance of products, purchase concentration and number of buyers affect customer response to marketing mix variables (see Caves 1986; Hagerty et al. 1988; Lilien 1979; Nagle 1987). To control for differences in the location of the served market, a dummy variable equals 1 if the SBU serves the North ‘American market (United States only, or United States as well as Canada), and 0 if the ‘SBU serves smaller markets such as the United Kingdom. Previous research suggests that quality, salesforce and promotion elasticities are rela tively large when buyer search for information is high and when purchase frequency is Tow (Caves 1986; Hagerty et al. 1988). Hence, businesses engaged in selling high search products that are infrequently purchased, such as consumer durables, capital goods and industrial components, should be more likely to belong to the quality/salesforce-sensitive ‘pool, and to some extent the salesforce-sensitive pool. Hagerty et al. (1988) argue that ‘when businesses are in the growth stage of the product life cycle, they are “able to influence sales most effectively through marketing elements that emphasize communication (ad- Vertising and promotion) and distribution (salesforce). In contrast, firms with mature products should find changes in quality and price more effective” (p. 3). Hence, businesses in the growth stage of the PLC should be more likely to belong to the quality/salesforce- sensitive pool, as well as the salesforce-sensitive pool. On the other hand, businesses with ‘mature products are more likely to belong to the price-sensitive poo! wherein customers seem to be very price elastic, although not at the expense of quality. Also the industry- ‘standard pool should consist of mature, stable businesses since the market size elasticity is close to unity. Nagle (1987) argues that buyers are more sensitive to a product’ price when it accounts for a large proportion of their purchase expenditures, Hence, when product importance is high (ie., the type of products sold by the SBU account for a large proportion of a customer's annual purchases), the price elasticity should be large. Further, when product ppurchases are concentrated amongst relatively few buyers, then the buyers have more bargaining power and can force vendor prices down (Porter 1980). Hence, businesses in markets with high product importance and buyer concentration are more likely t belong to the price-sensitive pool. Finally, for businesses in the sample, seller-supplied information is typically disseminated via the salesforce, since salesforce expenditures, constitute a significant component of marketing expenditures. Since the demand for such information is greater when the number of buyers is large (Caves 1986), the salesforce clasticity should be high, Hence, businesses serving a large number of buyers are more likely to belong to the salesforce-sensitive and quality/ salesforce-sensitive pools. Business Scope. Porter (1980) distinguishes between an industry-wide business strategy and a focus strategy. Day (1990) points out that a business can focus along any or all of {hree dimensions involving geographic coverage, product scope and customer scope. A. regional-served market represents a focused geographic scope. A narrow product fine constitutes a focused product scope, and fewer types or smaller number sizes of customers * Given that the posterior probabilities of membership are ratio-scaled, the geometric mean captures the sentria” of SBU 1's patern of posterior probabilities (P, ..., Py). Hence, the logatio transform Qu jndkates the likelihood of SBU i belonging to atent-pool Kafer eooteling forts central tendency. ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 7 represents a focused customer scope. Both the product focus and customer focus variables ‘are measured relative to the SBU’s three largest competitors. ‘When a business sets an industry standard, the business should have an industry-wide perspective. Thus, the industry-siandard pool (27.4%) should tend to have an industry- wide scope. Low costs are generally required to profitably serve price sensitive customers. Since costs are often generated by scale economy and learning advantages ( Porter 1985), the price-sensitive pool (26.6%) should also tend to follow an industry-wide strategy. The salesforce-sensitive pool (38.2% ) could follow either an industry-wide or a focused strategy (On the one hand, customers that are sensitive to salesforce support could be willing to pay prices that arc high enough to offset the cost disadvantages associated with a focused strategy. For example, one niching strategy that Kotler (1991 ) suggests is being. a service specialist. On the other hand, customers in this pool are also price sensitive. As mentioned above, it can be difficult for a focused strategy to reduce costs to the point where price sensitive customers are satisfied ‘The most likely pool to follow a focused strategy is the guality/salesforce-sensitive pool (7.8%), This is because relatively high prices that are charged to support this strategy can help offset the cost disadvantages associated with a focused strategy. Note that this, Pool has the lowest price elasticity. Thus, a focused strategy can be profitable when customers are quality and salesforce sensitive and relatively price insensitive, Order of Market Entry. In the sample, 52% are market pioneers, 29% early followers and 19% late entrants. We specify dummy variables for early followers and late entrants 10 contrast these nonpioneers with the excluded market pioneer category. Order of market entry is selected because market pioneers frequently have opportunities to develop sus- tainable competitive advantages via a stronger marketing mix (see Lieberman and Mont- ‘gomery’s 1988 survey). ‘The industry-standard pool (27%) should tend havea smaller number of nonpioneers. Being first, market pioneers often have the opportunity to set the industry standard. For ‘example, Carpenter and Nakamoto (1989) find that when quality is subjective, consamer preferences are actually shaped towards the pioneering brand. This preference can lead consumers to associate the product category with the pioneering brand. Assuming the ‘market pioneer has established an industry standard, nonpioneers (early followers and late entrants) must typically differentiate themselves from the pioneer (Aaker and Day 1986; Yip 1982). The differentiated pools cover price sensitive (27%), salesforce sensitive (38%), and quality /salesforce sensitive (8%) customers. Do nonpioneers have a competitive advantage in serving price sensitive customers? Lower costs provide a key competitive advantage in serving price sensitive customers. ‘On the one hand, by being first, market pioneers often have lower initial costs from either scale or learning advantages (see Lieberman and Montgomery 1988). Even so, when technologies change, nonpioneers can leapfrog the pioneer and offer lower costs. Aso, learning advantages typically leak out to competitors (Mansfield 1985). Empirically, Robinson and Fornell (1985) and Robinson (1988) provide insights on pioneer cost savings in mature markets. Direct costs, which include purchasing, manufacturing and physical distribution, are roughly 1% to 2% lower for market pioneers. While these direct ccost savings are modest, they favor the market pioneer. Because of these lower costs, somewhat more market pioneers should be serving the price-sensitive pool. - Do market pioneers tend to serve salesforce sensitive customers? Pioneers would have an advantage if their higher market shares generated salesforce economies. Empirical evidence in Scherer etal. (1975, pp. 253-260) and Robinson (1988) does not support ‘meaningful salesforce economics. Thus, nonpioneers should be able to differentiate their offering by serving salesforce sensitive customers, and are more likely to belong to the salesforce-sensitive pool. Nonpioneers should also tend to serve customers in the quality/ salesforce-sensitive pool. As mentioned earlier, this pool should tend to follow a focused 18 \V, RAMASWAMY, W. S. DESARBO, D. J. REIBSTEIN & W. T. ROBINSON ‘TABLES Analysis of Posterior Probaiiies* Price Quality Salesforce Salesforce Industry Business(Market Sensitive Pool _Sesitive ool Sensitive Pool_—_Standard Pool Variables (266%) (0.85) (G82) 788) Demand Characteristics: High Buyer Search 0021 ore uot -ossie Purchase Frequency 0031 0.208" 0017 02a" Growth Siage ofthe PLC =0.1494* oar oar oan Importance of Products 0.250" 0087 0.088 ‘ora Purchase Concentation 0.149" 0021 0021 0.106 Number of Buyers 0010 ~aarsere one 0245" Nor Amencan Market (0.006 0290" ons aggre Bsness Scope Repional Focus 0.008 otis 0182 asic Product Focus 0.029 o3are 0.100 Hoare ‘Customer Focus 0087 ose ‘0082 025 ‘Order of Market Entry: Barly Follower 0.128" oz conse -0231¢ {ate Entrant ‘0086 ozs 083 oan Intercept 260 mise ware 1.060% iketinood Ratio X2 21.098" 96.860" zane wpe * Significance levels are conservatively based on two-tsled et. +p =0.10. stp 5005, 9 #001 strategy. Because market pioneers can pick off the biggest and best segments for themselves, nonpioneers are often forced to pick up the crumbs that are left behind (Lambkin and Day 1989). Since late entrants have even fewer segments to target than early followers, they should have the greatest tendency to follow a focus strategy. Tn summary, market pioneers should tend to set the industry standard. Because of ower costs, they should also have a modest advantage in serving price sensitive customers. Nonpioncers can differentiate themselves by serving salesforce sensitive customers. Early followers and to a larger extent, late entrants, should tend to serve customers that are quality /salesforce sensitive. Results, The results of these post hoc analyses of posterior probabilities are shown in Table 5° The coefficients have been standardized to facilitate relative comparisons, Comparing the likelihood ratio x? for each pool with a critical x? with 12 degrees of freedom, the results forall the four pools are significant as shown in Table S. The observed impact of the business/market variables for each of the pools are discussed below. From Table 5, businesses in the price-sensitive pool are less likely to be in the growth stage of the PLC, sell products that are of high purchase importance and operate in ‘markets wherein buyer concentration is high. Since this pool has a high price elasticity and an average quality elasticity, these results are consistent with previous PIMS research ‘which suggest that low price and adequate quality constitute an effective strategy for ‘mature businesses (Woo and Cooper 1982). The results also lend empirical support to ‘the arguments of Nagle (1987) and Porter (1980) that the importance of the purchase » Note, the objective ofthese analyse it to dlagnose pool membership and profil each of the derived pools with respect to the explanatory variables. Hence, the fesuls are interpreted in accordance with the separate “Analyses foreach pool. Due tothe row sum constraint inherent in the posterior probabilities, the coficients for each variable in Table § sum to zero across the derived pools. ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA 19 to the buyer and purchase concentration affect price elasticity. The product scope and customer scope variables are not significant. This suggests an industry-wide scope since these variables are measured relative to the three leading competitors, who should be pursuing an industry-wide strategy. The order of entry effects are not strong for this pool. For the quality /salesforce-sensitive pool, the distinguishing demand characteristies are that these businesses are engaged in selling high search products, with low purchase frequencies, operate in the growth stage of the PLC, However, businesses in this pool cater toa smaller number of customers, though the salesforce elasticity is high. A possible explanation is the contingent effect of business scope, which tends to be focused for businesses in this pool. Note that all the three business scope variables are strongly sig- nificant and positive. This indicates that businesses in this pool have a strong regional focus and offer narrow product lines with a narrow customer focus relative to competition. This is the profile of a niching strategy. These businesses seem to be “niche specialists” as they focus along all three aspects of business scope (Day 1990). Further, as expected, ‘these businesses are primarily nonpioneers, and in particular, late entrants. These results therefore provide empirical evidence of a differentiation focus strategy. For the salesforce-sensitive pool, the businesses are more likely to be in the growth stage of the PLC and cater to a large number of buyers, consistent with our expectations, None of the business scope variables are significant, suggesting that businesses in this pool tend to follow an industry-wide strategy. The order of entry effects indicate that ‘arly followers tend to be in this pool. Since this pool has a large salesforce elasticity, these carly followers seem to adopt a push strategy with respect to personal selling effort. ‘The moderately large price elasticity for this pool also suggests a penetration pricing policy. These results are consistent with the proposition that early followers rely more ‘on their own push-oriented efforts to build sales, since market pioneers often develop strong brand names /reputations (Schmalensee 1982) For the industry-standard pool, the businesses tend to be in mature markets and are engaged in selling low search products which are frequently purchased by a large number of buyers. The results for the business scope variables clearly indicate that these businesses have a broad geographic scope and offer broad product lines with a broad customer scope relative to competition. As expected, this pool tends to consist of market pioneers. Those businesses serving markets outside of North America also tend to belong to this pool. (It ‘may be easier to establish an industry standard in relatively smaller markets.) Businesses in the industry-standard pool also tend to command high market shares since their mean market share is 34%, which is much greater than the mean market share of 26% across the entire sample. This supports similar findings for market pioneers in previous research (Robinson and Fornell 1985; Robinson 1988; Urban etal. 1986). Hence, in addition to demand criteria, our results support the importance of other potential pooling criteria, such as business scope and order of market entry, which impact pool membership. For any individual business, itis possible to use these results to obtain benchmark estimates for its marketing mix elasticities. This can be accomplished by ‘weighting the pool-specifc elasticities with the probabilities of membership into the dif- ferent pools, An estimate of the membership probability for pool k can be computed as exp(Ga)/(Zx exp(Qu)), where Oa = Z, Zrbuy is the predicted value using Expres- sion (27), 4.6. Advantages and Limitations Our empirical pooling approach has four advantages relative to a priori pooling. First, it does not require additional descriptive data on each cross-section, which is necessary "We computed this via @ weighted average of busines market shars, with the posterior probabiles as weights. 120 \V. RAMASWAMY, W, S, DESARBO, D. J. REIBSTEIN & W. T. ROBINSON 10 form a priori pools. Such data may not be available in certain situations. Second, even ifsuch data are available, in the absence of relatively strong theory or bases for choosing a priori pooling criteria, our proposed method is an alternative approach for deriving disaggregate estimates. Moreover, if some of the descriptive variables are not nominal- scaled they have to be categorized (sometimes arbitrarily) to form a priori groups. Third, as noted earlier, if the number of a priori groups is large, it becomes practically cum- bersome to conduct pooling tests for various levels of pooling. Fourth, the groups that are formed a priori are typically discrete, with each cross-section (SBU) belonging to only one ofthe groups. Our approach results in pools wherein each SBU has a probabilistic ‘membership into each pool (which accommodates discrete partitions as a special case). ‘The parameter estimates for the derived pools parsimoniously describe the cross-sectional heterogeneity in elasticity magnitudes and patterns, as well as the error structure. ‘Our method, however, is not without accompanying caveats and limitations. Foremost, it is not meant to be a substitute for theory-testing using an a priori pooling approach. In other words, an a priori approach is more amenable to forming groups of cross- sections that vary on specific criteria of interest, in order to test specific hypotheses per- taining to differences in certain regression parameters across the groups. Further, sti- ‘mation problems may surface in some instances, especially when the centroids of the conditional parametric distributions are not sufficiently separated, or when the elements of Ax become quite large; however as discussed earlier, the methodology provides diag- nostics for identifying these potential problems. A related caveat is with respect to mode! selection. The AIC, BIC and CAIC serve as heuristics for picking the level of disaggregate pooling, If they all do not point to the same solution, researcher judgment is required in selecting the number of pools. Overall, a general implication of the results from our empirical application is that ‘when employing an a priori pooling approach, care must be taken in specifying appropriate criteria to form the pools. In situations where such criteria are numerous and or complex, misspecification could result in potentially inaccurate and misleading (disaggregate) pa- rameter estimates, Moreover, in cross classifying a large number of a priori criteria, estimation problems arise if several of the cells are relatively sparse. 5. Conch We have devised a new latent-pooling method that addresses the frequently encountered problem of analyzing cross-sectional data with limited time series. The natural solution js to pool the data cross-sectionally. Yet, when confronted with the danger of ageregating heterogeneous data, itis necessary to seek a way of grouping the cross-sections in some ‘homogeneous fashion. One approach is to pool cross-sections according to some a priori criteria; that is, pooling together those cross-sections which one believes in advance to bbe very similar in their structural relationships. This paper presents an alternative method for empirically deriving pools of cross-sections and directly estimating the structural relationships that exist within each pool. We illustrate this empirical pooling approach by estimating marketing mix elasticities of demand with PIMS data which entail sparse ‘time-series observations for a large number of businesses. Four pools are derived that exhibit considerable variation in elasticity magnitudes and patterns. ‘The post hoc analyses of the posterior probabilities suggest various combinations of business /market characteristics that contribute to differences in elasticities among the four pools. A key market characteristic is the product life cycle which impacts the mem- bership of all the four derived pools. This is consistent with research in the strategy arca which suggests that strategic actions are contingent upon the product life cycle and en~ vironmental conditions (Thietart and Vivas 1984). Other demand characteristics such as buyer search, purchase frequency, product importance and purchase concentration are also associated with elasticities of demand. ESTIMATING MARKETING MIX ELASTICITIES WITH PIMS DATA, 121 Apart from demand characteristics, the scope of a business is found to affect the mag- nitude and pattern of marketing mix elasticities. Geographic scope, product scope and customer scope all influence pool membership. A key finding is the uncovering of a small ‘group of niche specialists with a regional focus, a narrow product scope and a narrow ‘customer scope. These niche specialists have a high quality and salesforce elasticity in the PIMS database. The results regarding order of market entry indicate that a majority of the market pioneers tend to have an industry-wide scope and establish an industry standard. A majority of the early followers also tend to have an industry-wide scope while emphasizing a push-oriented strategy. Late entrants engage in a focus strategy with a tendency towards being niche specialists. Finally, while this paper has focused on the estimation of elasticities using the PIMS

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