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Accounting for Primary and Secondary Demand Effects with Aggregate Data

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Author Info

  • Harikesh Nair

    ()
    (Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, Illinois 60637)

  • Jean-Pierre Dubé

    ()
    (Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, Illinois 60637)

  • Pradeep Chintagunta

    ()
    (Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, Illinois 60637)

Abstract

Discrete choice models of aggregate demand, such as the random coefficients logit, can handle large differentiated products categories parsimoniously while still providing flexible substitution patterns. However, the discrete choice assumption may not be appropriate for many categories in which we expect consumers may purchase more than one unit of the selected item. We derive the aggregate demand system corresponding to a discrete/continuous household-level model of demand. We also propose a method-of-simulated-moments procedure that provides consistent estimates of the structural parameters when only aggregate data are available. The procedure also enables the researcher to control both for the potential endogeneity of marketing variables as well as potential heterogeneity in consumer tastes. Using our aggregate estimates, we can measure the decomposition of price elasticities into incidence, brand choice, and purchase quantity components. We also propose several empirical tests to assess the validity of the discrete/continuous demand system versus that of the logit model. In several simulation experiments, we demonstrate the robustness of this model across datasets in which quantity choices may or may not be important. Our empirical calibration to store-level data in the refrigerated orange juice category indicates a considerable improvement in fit of the observed aggregate sales using the discrete/continuous model.

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File URL: http://dx.doi.org/10.1287/mksc.1040.0101
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 24 (2005)
Issue (Month): 3 (November)
Pages: 444-460

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Handle: RePEc:inm:ormksc:v:24:y:2005:i:3:p:444-460

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Related research

Keywords: discrete/continuous demand system; logit demand system; aggregate data; price endogeneity; primary and secondary demand;

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References

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  1. Jeongwen Chiang, 1991. "A Simultaneous Approach to the Whether, What and How Much to Buy Questions," Marketing Science, INFORMS, vol. 10(4), pages 297-315.
  2. Jean-Pierre Dubé, 2004. "Multiple Discreteness and Product Differentiation: Demand for Carbonated Soft Drinks," Marketing Science, INFORMS, vol. 23(1), pages 66-81, September.
  3. Lakshman Krishnamurthi & S. P. Raj, 1988. "A Model of Brand Choice and Purchase Quantity Price Sensitivities," Marketing Science, INFORMS, vol. 7(1), pages 1-20.
  4. Neeraj Arora & Greg M. Allenby & James L. Ginter, 1998. "A Hierarchical Bayes Model of Primary and Secondary Demand," Marketing Science, INFORMS, vol. 17(1), pages 29-44.
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  7. Erdem, Tulin & Imai, Susumu & Keane, Michael, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," MPRA Paper 52516, University Library of Munich, Germany.
  8. David R. Bell & Jeongwen Chiang & V. Padmanabhan, 1999. "The Decomposition of Promotional Response: An Empirical Generalization," Marketing Science, INFORMS, vol. 18(4), pages 504-526.
  9. Greg M. Allenby & Peter E. Rossi, 1991. "Quality Perceptions and Asymmetric Switching Between Brands," Marketing Science, INFORMS, vol. 10(3), pages 185-204.
  10. Pradeep K. Chintagunta, 1993. "Investigating Purchase Incidence, Brand Choice and Purchase Quantity Decisions of Households," Marketing Science, INFORMS, vol. 12(2), pages 184-208.
  11. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  12. Bhat, Chandra R., 2001. "Quasi-random maximum simulated likelihood estimation of the mixed multinomial logit model," Transportation Research Part B: Methodological, Elsevier, vol. 35(7), pages 677-693, August.
  13. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
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  15. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September.
  16. William R. Dillon & Sunil Gupta, 1996. "A Segment-Level Model of Category Volume and Brand Choice," Marketing Science, INFORMS, vol. 15(1), pages 38-59.
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Citations

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Cited by:
  1. Richards, Timothy J. & Acharya, Ram N. & Molina, Ignacio, 2009. "Retail and Wholesale Market Power in Organic Foods," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49329, Agricultural and Applied Economics Association.
  2. Amit Gandhi & Zhentong Lu & Xiaoxia Shi, 2013. "Estimating demand for differentiated products with error in market shares," CeMMAP working papers CWP03/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  3. Sridhar Narayanan & Pradeep Chintagunta & Eugenio Miravete, 2007. "The role of self selection, usage uncertainty and learning in the demand for local telephone service," Quantitative Marketing and Economics, Springer, vol. 5(1), pages 1-34, March.
  4. Richards, Timothy J. & Hamilton, Stephen F. & Patterson, Paul M., 2007. "Spatial Competition in Private Labels," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9840, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Ching-I Huang, 2008. "Estimating demand for cellular phone service under nonlinear pricing," Quantitative Marketing and Economics, Springer, vol. 6(4), pages 371-413, December.
  6. Ramanathan, Usha & Muyldermans, Luc, 2010. "Identifying demand factors for promotional planning and forecasting: A case of a soft drink company in the UK," International Journal of Production Economics, Elsevier, vol. 128(2), pages 538-545, December.
  7. Arnade, Carlos A. & Gopinath, Munisamy & Pick, Daniel H., 2011. "How Much Do Consumers Benefit from New Brand Introductions? The Case of Potato Chips," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), April.
  8. Pinar Karaca-Mandic, 2011. "Role of complementarities in technology adoption: The case of DVD players," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 179-210, June.
  9. Ishida, Takashi & Fukushige, Mototsugu, 2010. "The effects of fishery harbor-based brands on the brand equity of shore fish: An empirical study of branded mackerel in Japan," Food Policy, Elsevier, vol. 35(5), pages 488-495, October.
  10. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, vol. 26(6), pages 792-804, 11-12.

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