A Regime-Switching Model of Cyclical Category Buying
In many categories consumers display cyclical buying: they repeatedly purchase in the category for several periods, followed by several periods of not buying. We believe that the cyclicality is a manifestation of cross-category substitution by the consumer, caused by "variety-seeking" tendencies as well as by the firm's marketing activities in all relevant categories. We propose a Markov regime-switching random coefficient logit model to represent these behaviors as stochastic switching between high and low category purchase tendencies. The main feature of the proposed model is that it divides the stream of purchase decisions of a consumer into distinct regimes with different parameter values that characterize high versus low purchase tendencies. In an empirical application of the model to purchases of yogurt-buying households, we find that as many as 38.3% households display cyclicality between high and low yogurt-purchasing tendencies. Predictions from our proposed model track observed yogurt purchases of households over time closely, and the model also fits better than two benchmark models. Alternating between high and low purchase tendencies may correspond with changing levels of consumer inventory in a substitute category. If one ignores this phenomenon, a correlation between yogurt inventory and the error term in utility arises, leading to biased estimates. Also, we show that cyclicality in buying has a key implication for a firm's price promotion strategies: a price reduction that is offered to a household during its high purchasing tendency period will result in greater increases in sales than one that is offered during its low purchasing period. This opens up a new dimension for enhancing the effectiveness of promotions--customized timing of price reductions.
Volume (Year): 30 (2011)
Issue (Month): 3 (05-06)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vishal P. Singh & Karsten T. Hansen & Robert C. Blattberg, 2006. "Market Entry and Consumer Behavior: An Investigation of a Wal-Mart Supercenter," Marketing Science, INFORMS, vol. 25(5), pages 457-476, September.
- Alan L. Montgomery & Shibo Li & Kannan Srinivasan & John C. Liechty, 2004. "Modeling Online Browsing and Path Analysis Using Clickstream Data," Marketing Science, INFORMS, vol. 23(4), pages 579-595, November.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Pradeep Chintagunta & Jean-Pierre Dubé & Khim Yong Goh, 2005. "Beyond the Endogeneity Bias: The Effect of Unmeasured Brand Characteristics on Household-Level Brand Choice Models," Management Science, INFORMS, vol. 51(5), pages 832-849, May.
- Bart J. Bronnenberg & Michael W. Kruger & Carl F. Mela, 2008. "—The IRI Marketing Data Set," Marketing Science, INFORMS, vol. 27(4), pages 745-748, 07-08.
- Dockner, Engelbert J & Feichtinger, Gustav, 1993. "Cyclical Consumption Patterns and Rational Addiction," American Economic Review, American Economic Association, vol. 83(1), pages 256-63, March.
- Pradeep K. Chintagunta & André Bonfrer & Inseong Song, 2002. "Investigating the Effects of Store-Brand Introduction on Retailer Demand and Pricing Behavior," Management Science, INFORMS, vol. 48(10), pages 1242-1267, October.
- Oded Netzer & James M. Lattin & V. Srinivasan, 2008. "A Hidden Markov Model of Customer Relationship Dynamics," Marketing Science, INFORMS, vol. 27(2), pages 185-204, 03-04.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:30:y:2011:i:3:p:469-480. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.