Abstract
We put forward a brand choice model with unobserved heterogeneity that concerns responsiveness to marketing efforts. We introduce two latent segments of households. The first segment is assumed to respond to marketing efforts, while households in the second segment do not do so. Whether a specific household is a member of the first or the second segment at a specific purchase occasion is described by household-specific characteristics and characteristics concerning buying behavior. Households may switch between the two responsiveness states over time. When comparing the performance of our model with alternative choice models that account for various forms of heterogeneity for three different datasets, we find better face validity for our parameters. Our model also forecasts better.
Highlights
The use of brand choice models has become standard practice in marketing research [1,2,3,4]
Households differ in the amount of effort they wish to invest in a particular purchase, and they will most likely differ in their responsiveness to marketing efforts
The choice model we developed in this paper incorporates the responsiveness of a household at a specific purchase occasion as a form of unobserved heterogeneity
Summary
The use of brand choice models has become standard practice in marketing research [1,2,3,4]. In the above-mentioned approaches, tastes are usually assumed to be constant during the observation period for each household This assumption is needed to identify the random heterogeneity. Households, who choose amongst brands within a specific product category, may differ in their response to marketing efforts. Choice behavior of responsive households can be explained by their base preferences, by marketing efforts and by their purchase history. We put forward a brand choice model that incorporates responsiveness to marketing efforts as an explicit form of heterogeneity. To capture differences in responsiveness over time, households are allowed to switch between the two segments across purchase occasions. The approach in the present paper is somewhat related to structural heterogeneity, where one allows individuals to have different decision strategies.
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