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Modeling Multiple Sources of State Dependence in Random Utility Models: A Distributed Lag Approach

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  • P. B. Seetharaman

    (John M. Olin School of Business, Washington University, Campus Box 1133, One Brookings Drive, St. Louis, Missouri 63130-4899)

Abstract

We propose a utility-theoretic brand-choice model that accounts for four different sources of state dependence: 1. effects of lagged choices (), 2. effects of serially correlated error terms in the random utility function (), 3. effects of serial correlations between utility-maximizing alternatives on successive purchase occasions of a household (), and 4. effects of lagged marketing variables (). Our proposed model also allows habit persistence to be a function of lagged marketing variables, while accommodating the effects of unobserved heterogeneity in household choice parameters. This model is more flexible than existing state-dependence models in marketing and labor econometrics. Using scanner panel data, we find structural state dependence to be the most important source of state dependence. Marketing-mix elasticities are systematically understated if state-dependence effects are incompletely accounted for. The Seetharaman and Chintagunta (1998) model is shown to recover spurious variety-seeking effects while overstating habit-persistence effects. Ignoring habit persistence type 1 leads to an underestimation, while ignoring habit persistence type 2 leads to an overestimation of structural state-dependence effects. We find lagged promotions to have carryover effects on habit persistence. Ignoring one or more sources of state dependence underestimates the total incremental impact of a sales promotion. We draw implications for manufacturer pricing.

Suggested Citation

  • P. B. Seetharaman, 2004. "Modeling Multiple Sources of State Dependence in Random Utility Models: A Distributed Lag Approach," Marketing Science, INFORMS, vol. 23(2), pages 263-271, April.
    • Handle: RePEc:inm:ormksc:v:23:y:2004:i:2:p:263-271
    DOI: 10.1287/mksc.1030.0024
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    References listed on IDEAS

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