Why Market Shares Matter: An Information-Based Theory

Abstract

Consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods. When firms are ignorant about q, consumers rationally believe that a firm with a high market share is likely to produce a highquality good. As a result, firms try to signal-jam the inferences of consumers and compete for market shares beyond the level explained by short-run profit maximization. When firms know q, multiple equilibria may exist, but under a regularity condition, there is one equilibrium in which market shares signal quality, and then the market tends to be more competitive.

Is export promotion effective in developing countries? Firm-level evidence on the intensive and the extensive margins of exports

“…In contrast, these activities do not seem to have had a consistent significant impact on firms' intensive margin of exports. These results, which are robust across alternative specifications and estimation methods, are consistent with both the 4 This might happen if firms from these countries only have small market shares as consumers attach informational value to quantity and may interpret low market shares as a signal of low quality (see Caminal and Vives, 1996). 5 In particular, our study aims at providing PROMPEX and other Latin American and Caribbean export promotion agencies with a set of analytical instruments to evaluate their actions.…”

We’re Number 1: Price Wars for Market Share Leadership

“…Consumer #1 effects may result from a rational Bayesian process (Caminal and Vives, 1996) or simply because it's less risky to buy from a market leader: as the saying goes, "no one ever got fired for buying IBM" (that is, when IBM was a clear market leader). Consistent with this view, recent research suggests that demand responds to ordinal rankings in the case of music (Sorensen, 2007), iPhone apps (Carare, 2012) and movies (Cabral and Natividad, 2013).…”

“…At a theoretical level, Caminal and Vives (1996) provide a Bayesian foundation for an equilibrium where market shares signal quality, and thus consumers are willing to pay more for products with greater market share. However, they do not explain why there would be ordinal effects.…”

Capacity Expansion in Markets with Intertemporal Consumption Externalities

“…Becker (1991) studies restraint pricing where consumer demand is positively related to market capacity, and Caminal and Vives (1996) analyze the importance of past market share as a signal of product quality 8 . The model in this paper builds on these points of view 9 . Assuming the existence of an intertemporal consumption externality, this paper explores how it affects market capacity expansion depending on market concentration.…”

“…8 See also Doganoglu (2003) who examines dynamic price competition in a horizontally differentiated duopoly market. 9 In the marketing literature, the modeling of S-shaped product diffusion relies largely on so-called "epidemic" models established by Bass (1969). See Mahajan, Muller and Bass (1990Bass ( , 1995.…”