The Price Consideration Model of Brand Choice
University of Toronto - Rotman School of Management
New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Marketing
Michael P. Keane
Arizona State University (ASU) - Economics Department; University of Technology, Sydney (Visiting July 2006-Present)
Journal of Applied Econometrics, Vol. 24, No. 3, pp. 393-420, April/May 2009
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. They predict market shares well, but not inter-purchase spell lengths. In this paper, we propose a new model of brand choice, the price consideration (PC) model, that allows more flexibility in the relation between purchase incidence and brand choice elasticities.
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 Nielsen scanner data on peanut butter and ketchup, 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.
Number of Pages in PDF File: 46
Keywords: Brand Choice, Purchase Incidence, Price Elasticity, Inter-purchase Spell
JEL Classification: C25, C41, M31Accepted Paper Series
Date posted: April 10, 2006 ; Last revised: December 27, 2009
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