A Flexible Demand Model for Complements Using Household Production Theory

55 Pages Posted: 30 Aug 2017 Last revised: 16 Oct 2018

See all articles by Ludovic Stourm

Ludovic Stourm

HEC Paris

Raghuram Iyengar

University of Pennsylvania - Marketing Department

Eric Bradlow

University of Pennsylvania - Marketing Department

Date Written: October 16, 2018

Abstract

We utilize household production theory to address the problem of micro-level demand estimation across complementary goods. According to this theory, consumers buy inputs and combine them to produce final goods from which they derive utility. We use this idea to build a structural model of demand for complements that can be estimated on purchase data in the presence of corner solutions and indivisible packages. We find that, even when reusing the same functional form as some previous models of demand for substitutes, our model can accommodate very different patterns of consumer preferences over complements and lead to a flexible demand system from perfect complementarity to no complementarity. We estimate the model on purchase data from a panel of consumers and show how it can be used to increase the profitability of couponing strategies by taking into account the spillover effect of coupons on demand for complementary categories. We also show how our model can be used by manufacturers to make decisions regarding the size of packages by taking into account cross-category consumption.

Keywords: Utility Theory, Multicategory Demand Models, Bayesian Estimation

Suggested Citation

Stourm, Ludovic and Iyengar, Raghuram and Bradlow, Eric, A Flexible Demand Model for Complements Using Household Production Theory (October 16, 2018). HEC Paris Research Paper, No. MKG-2017-1225. Available at SSRN: https://ssrn.com/abstract=3024480 or http://dx.doi.org/10.2139/ssrn.3024480

Ludovic Stourm (Contact Author)

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Raghuram Iyengar

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Eric Bradlow

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States
215-898-8255 (Phone)

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