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Observed and Unobserved Preference Heterogeneity in Brand-Choice Models

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Author Info

  • Dan Horsky

    ()
    (William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627)

  • Sanjog Misra

    ()
    (William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627)

  • Paul Nelson

    ()
    (William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627)

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    Abstract

    This paper extends the scanner-based choice literature by explicitly incorporating individual-level brand-preference data. We illustrate our model using a unique data set that combines survey and scanner data collected from the same individuals. The addition of individual-specific brand-preference information significantly improves fit and prediction. Furthermore, this “observed” heterogeneity better explains choice than does “unobserved” heterogeneity in the standard scanner model's parameters. More importantly, we find that the standard model underestimates the importance of consumers' brand preferences and overestimates both brand loyalties and price sensitivities. Brand loyalty is overestimated because models without preference information confound state dependence, heterogeneity, and preference effects. Price sensitivities are inflated because the “average” preference-based consumer is implicitly assumed to be more willing to switch from his preferred brand than is the “real” preference-based consumer. Further, standard models overestimate the heterogeneity in price and loyalty sensitivities and misidentify both price- and loyalty-sensitive consumers. The managerial implications of our findings and the applicability of our methodology when survey data are collected infrequently and for only a subsample of consumers are pursued. We demonstrate that even under these circumstances better populationwide pricing and promotion decisions are identified and more accurate targeting results.

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    File URL: http://dx.doi.org/10.1287/mksc.1050.0192
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 25 (2006)
    Issue (Month): 4 (07-08)
    Pages: 322-335

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    Handle: RePEc:inm:ormksc:v:25:y:2006:i:4:p:322-335

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    Related research

    Keywords: discrete choice; heterogeneity; scanner data;

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    Cited by:
    1. Andrew Ching & Fumiko Hayashi, 2006. "Payment card rewards programs and consumer payment choice," Payments System Research Working Paper PSR WP 06-02, Federal Reserve Bank of Kansas City.
    2. Nicola Jentzsch & Geza Sapi & Irina Suleymanova, 2010. "Joint Customer Data Acquisition and Sharing among Rivals," Discussion Papers of DIW Berlin 1045, DIW Berlin, German Institute for Economic Research.
    3. Fok, D. & Paap, R. & Franses, Ph.H.B.F., 2008. "Incorporating responsiveness to marketing efforts in brand choice modelling," Econometric Institute Research Papers EI 2008-15, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. Oded Netzer & Olivier Toubia & Eric Bradlow & Ely Dahan & Theodoros Evgeniou & Fred Feinberg & Eleanor Feit & Sam Hui & Joseph Johnson & John Liechty & James Orlin & Vithala Rao, 2008. "Beyond conjoint analysis: Advances in preference measurement," Marketing Letters, Springer, vol. 19(3), pages 337-354, December.

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