A Direct Utility Model for Market Basket Data
37 Pages Posted: 10 Aug 2009
Date Written: August 3, 2009
Abstract
Market basket data reflect purchases from multiple product categories, some of which are complements and others that are substitutes. Consumers are more likely to make joint purchases from categories that are complements, and less likely to make joint purchases from categories that are substitutes. Consumers are also more likely to make joint purchases during large-expenditure shopping trips, and when they are quickly satiated. In this paper, we develop a direct utility model for cross-category demand that separates these effects. A non-homothetic utility function is specified where brands within categories are assumed to be near-perfect substitutes, with the possibility of complements, substitutes, or independence across categories. Our model is applied to scanner-panel data that contains four inside categories (laundry detergent, fabric softener, paper towel, and toilette tissue) and an outside good. Results indicate purchase complementarity between laundry detergent and fabric softener, and purchase substitutability among other category pairs. We show that failing to account for satiation leads to mis-estimation of complementarity, and that variation in expenditure changes the relative composition of the market basket.
Keywords: Complementarity, Substitutes, Discrete Demand, Bayesian Estimation
JEL Classification: C11, C23, M31
Suggested Citation: Suggested Citation
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