Omitted Budget Constraint Bias and Implications for Competitive Pricing

Journal of Marketing Research, forthcoming

Posted: 30 Sep 2017 Last revised: 13 Dec 2022

See all articles by Max J. Pachali

Max J. Pachali

Tilburg University - Tilburg University School of Economics and Management

Peter Kurz

bms marketing + strategy

Thomas Otter

Goethe University Frankfurt - Department of Marketing

Date Written: November 29, 2022

Abstract

Standard Choice-Based Conjoint (CBC) models often ignore or insufficiently approximate consumers’ budget constraints, despite the prominent role of budget constraints in
economic theory. The authors offer a theoretically motivated improvement to the CBC
model that is especially appropriate for high-ticket durable goods and develop a Bayesian
method for the inference of unobserved budget constraints. The proposed method leverages respondents’ stated budget constraints that suffer from measurement error and respondents’ financial demographic variables as additional information to reduce the dependency
on functional form assumptions in the estimation. The authors show that accounting for
budget constraints substantially increases model fit and the accuracy of competitive pricing in an industry-grade discrete-choice experiment on consumer preferences for high-end
laptops. The proposed model performs better than the canonical linear price benchmark
model, which is not flexible enough to approximate budget constraints. In theory, more
flexible utility specifications, such as the non-linear dummy price model, can approximate
consumers’ budget constraints. However, they perform poorly when only finite data are
available. The authors conclude that applied researchers in industry and academia will
benefit from having a better tool for estimating budgets in high-ticket categories.

Keywords: budget restrictions, demand estimation, competitive pricing, choice-based conjoint, Bayesian inference

Suggested Citation

Pachali, Max J. and Kurz, Peter and Otter, Thomas, Omitted Budget Constraint Bias and Implications for Competitive Pricing (November 29, 2022). Journal of Marketing Research, forthcoming, Available at SSRN: https://ssrn.com/abstract=3044553 or http://dx.doi.org/10.2139/ssrn.3044553

Max J. Pachali (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://sites.google.com/site/mjpachali/

Peter Kurz

bms marketing + strategy ( email )

Landsberger Str. 487
Munich, Bavaria 81241
Germany

Thomas Otter

Goethe University Frankfurt - Department of Marketing ( email )

Frankfurt
Germany
++49.69.798.34646 (Phone)

HOME PAGE: http://www.marketing.uni-frankfurt.de/index.php?id=97?&L=1

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,917
PlumX Metrics