A latent class generalised nested logit model and its application to modelling carrier choice with market segmentation

Abstract

This article develops a new latent class (LC) model with a generalised nested logit (GNL) formulation to enhance the methodology of market segmentation analysis. The standard generalised nested logit (or the cross-nested logit model) is a special case of the latent class generalised nested logit model (LCGNL) that accounts for heterogeneity in individuals’ preferences by a number of segments and simultaneously identifies segment sizes and individual profiles. In addition, the LCGNL model allows flexible substitution patterns among alternatives. This extends the standard LC model with the multinomial logit formulation, such that the independence from irrelevant alternatives property does not hold within segments. The proposed model was used to identify potential segments of travellers’ preferences towards air and bus carriers. The estimation results of the LCGNL models indicate that degrees of competition vary across carriers and that differential sensitivity in preference parameters exists between segments. The LCGNL model outperforms the other models; therefore, it is a better approach for analysing carrier choice behaviour.