The Price Consideration Model of Brand Choice

Ching, Andrew and Erdem, Tulin and Keane, Michael (2007): The Price Consideration Model of Brand Choice. Forthcoming in: Journal of Applied Econometrics

Abstract

The workhorse brand choice models in marketing are the multinomial logit (MNL) and nested multinomial logit (NMNL). These models place strong restrictions on how brand share and purchase incidence price elasticities are related. In this paper, we propose a new model of brand choice, the “price consideration” (PC) model, that allows more flexibility in this relationship. In the PC model, consumers do not observe prices in each period. Every week, a consumer decides whether to consider a category. Only then does he/she look at prices and decide whether and what to buy. Using scanner data, we show the PC model fits much better than MNL or NMNL. Simulations reveal the reason: the PC model provides a vastly superior fit to inter-purchase spells.

• Item Type: MPRA Paper
• Institution: University of Toronto
• Language: English
• Keywords: Brand Choice; Purchase Incidence; Price Elasticity; Inter-purchase Spell
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C41 - Duration Analysis ; Optimal Timing Strategies; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities

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