VOLATILITY IN THE CONSUMER PACKAGED GOODS INDUSTRY — A SIMULATION BASED STUDY

Abstract

The volatility in a CPG market is modeled using a bottom-up simulation approach and validated against disaggregated supermarket transactions data. The simulation uses independent agents, each agent representing unique households in the data. A simple behavioral model incorporates household preferences for product attributes and prices. Our validation strategy tests the model predictions at both macro and micro levels and benchmarks the performance in each against a random choice model. The model significantly outperforms the benchmark at both levels. At the macro level, choices made by heterogenous agents accurately captures the volatility in market shares over time. This accuracy at the macro level is driven by the accuracy of predictions at the micro household level SKU and attribute choice.