Experiments in Competitive Product Positioning : Actual Behavior Compared to Nash Solutions

Almost all results on competitive product positioning derived in the literature so far are based on the hypothesis that static Nash equilibria of profit-maximizing competitors are accurate predictors of final market configurations. If the positioning behavior of firms differs from this assumption, it is questionable whether the corresponding propositions can be used in optimal product positioning. In this paper, we explore the validity of the Nash reaction hypothesis. We use a newly developed marketing simulation game, PRODSTRAT, to observe decisions of 240 advanced marketing students on product position, price, and marketing budget under various market conditions. We compare the players’ final configurations to Nash equilibria under the assumption that all players attempt to maximize their profit. Our results show that pricing and budgeting decisions are very well described by Nash equilibria for fixed product positions, but that decisions on product positioning are significantly more competitive. The experiments lead to less differentiated market configurations. The result is increased pricing as well as budgeting competition, and significantly reduced profits. We develop and support the hypothesis that the more aggressive product positioning behavior observed here stems from attempts to reduce profit differences (asymmetry) relative to competitors. Since profit asymmetry occurs in many market settings, it is an important factor to consider in making product positioning decisions in a competitive environment.