Equilibrium Characteristics of Multinomial Logit Market Share Models

Abstract

Previous research suggests that a multinomial logit model of market share can be used in optimization or equilibrium analyses of marketing decision making. However, there are significant problems with the solutions obtained from such an analysis. The authors show that for any firm with less than a 50% market share, the profit maximizing solution is to increase advertising as much as possible. The same holds true for any other positively signed marketing mix variable. The exponential property of the MNL model precludes reasonable descriptions of firm behavior in this case. Thus, the MNL market share model is inappropriate for equilibrium analysis of marketing competition.