An Integrated Model of Demand Allocation among and within Product Categories

The authors propose an integrated model that links consumers' budget allocation decisions at two different stages. The first stage concerns consumers' decisions to allocate budget among product categories, and the second stage concerns allocating the assigned budget among brands. In each stage, the authors assume that consumers behave rationally by determining the optimal demand for the category as well as for the brand to maximize utility. The authors use scanner data from purchases of instant coffee, coffee cream, tea, and instant curry to investigate the role of consumer preference and price in a hierarchical budget allocation problem. They also discuss some implications of anticipating a change in quantity demanded because of a change in expenditure and price. Researchers can use the model to examine the marginal effects of expenditure not only on category but also on brand purchase quantity.