A Dynamic Analysis of Market Structure Based on Panel Data

Abstract

Internal market structure analysis infers brand positions in an attribute space from preference and choice data, given a market in which consumers have heterogeneous tastes for attributes. Previous market structure models have adopted a static framework (e.g., Elrod 1988, Chintagunta 1994, Elrod and Keane 1995). Furthermore, they assumed that consumer perceptions of brand attributes do not vary across consumers. Yet, these approaches may render inaccurate representations of market structure if there is state dependence in consumer choice behavior. This paper attempts to incorporate consumer choice dynamics into market structure models by specifying the source of choice dynamics explicitly. In particular, the process by which past purchases affect current choices is modeled in a framework which captures both consumer habit persistence and variety seeking behavior. More specifically, consumer preferences for brand attributes are modeled to depend on the attributes of brands bought on the previous purchase occasion. Furthermore, the modeling approach adopted incorporates heterogeneity in both consumer preferences and perceptions of brand attributes. The audience of this paper includes practitioners and academics interested in understanding consumer choice processes and inferring market structure from consumer choice data. The proposed models are estimated on Nielsen scanner panel data for margarine, peanut butter, yogurt, and liquid detergent using simulated maximum likelihood techniques. The empirical results suggest that accounting for choice dynamics improves both in-sample and out-of-sample fit. The results indicate that the average consumer is habit persistent in all the product categories studied. This result is consistent with the findings of Kannan and Sanchez (1994), who conducted an aggregate analysis of consumer variety seeking behavior across product categories. However, the results obtained in this paper suggest that consumers are heterogeneous with respect to the processes by which past purchases affect current purchases. These results provide strong evidence for habit persistence and variety seeking in brand attributes to be the behavioral source of consumer choice dynamics in food categories. Thus, consumer tastes (utility weights) seem to be affected by the attributes of the brands consumed in the past. Given the empirical result that a large proportion of consumers are habit persistent, this suggests that tastes are reinforced by the brand attributes consumed in the past. The empirical results also show that not accounting for state dependence in market structure models for panel data may produce misleading results, that is, depending on consumer behavior patterns, models that do not account for state dependence may distort the true nature of competition among brands. More specifically, the results confirm the expectation that if there is habit persistence, that is, if consumer tastes are reinforced by attributes of brands consumed in the past, models that do not capture this choice dynamics will overestimate the distance between (similar) brands. Furthermore, the policy experiments conducted suggest that (1) static models overestimate the short-run impact of a price cut on the sales of the brand on promotion, (2) price cuts hurt the sales of the more similar brands more, and (3) free samples affect relatively less similar brands the most. Finally, this paper studies variety seeking and habit persistence across brands over purchase occasions. However, variety seeking behavior may also involve the purchase of a portfolio of brands or items at a purchase occasion. Consumers may buy multiple items knowing that prior to the next trip they may want to consume different items (Simanson 1990, Walsh 1995). This type of behavior can be modeled within the context of dynamic expected utility maximization with forward-looking consumers. The development and estimation of market structure models that include forward-looking consumers who maximize expected-utility over a planning horizon, incorporating their future tastes and needs, and shopping for an inventory of brands, remain an important future research issue.