An Inter-Product Competition Model Incorporating Branding Hierarchy and Product Similarities Using Store Level Data

Posted: 19 Jan 2014 Last revised: 8 Feb 2015

See all articles by Sudhir Voleti

Sudhir Voleti

Indian School of Business (ISB), Hyderabad

Praveen K. Kopalle

Dartmouth College - Tuck School of Business

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Date Written: January 24, 2014

Abstract

We develop and implement a Bayesian Semi-parametric model of demand under inter-product competition that enables us to assess the respective contributions of branding hierarchy and inter-product similarity to explaining and predicting demand. To incorporate branding hierarchy effects, we use Bayesian hierarchical clustering inherent in a nested Dirichlet process to simultaneously partition brands, and SKUs conditional on brands, into groups of 'similarity clusters'. We examine cluster memberships and post-process the MCMC output to infer cluster properties by accounting for parameter uncertainty. Our proposed approach lends to a spatial competition interpretation in latent attribute space and helps uncover the extent to which competition across SKUs in the latent attribute space is local or global. In a related vein, we discuss the implications of well-defined groups of similar SKUs as sub-category or sub-market boundaries in latent attribute space.

We empirically test our model using aggregate beer category sales data from a mid-size US retail chain. We find that branding hierarchy effects dominate those from product similarity. We find that the model partitions the 15 brands in the data into 4 brand clusters and the 96 SKUs into 25 SKU clusters conditional on brand cluster membership. In estimating a set of models of spatial inter-product competition, we find that SKU competition is more local than global in that only subsets of products compete within groups of comparable products. Finally, we discuss the substantive implications of our results.

Keywords: Competition Modeling, Bayesian Semiparametrics, Nested Dirichlet Process

Suggested Citation

Voleti, Sudhir and Kopalle, Praveen K. and Ghosh, Pulak, An Inter-Product Competition Model Incorporating Branding Hierarchy and Product Similarities Using Store Level Data (January 24, 2014). Available at SSRN: https://ssrn.com/abstract=2381101 or http://dx.doi.org/10.2139/ssrn.2381101

Sudhir Voleti

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Praveen K. Kopalle (Contact Author)

Dartmouth College - Tuck School of Business ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-3612 (Phone)
603-646-1308 (Fax)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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