Accounting for Primary and Secondary Demand Effects with Aggregate Data

35 Pages Posted: 17 Nov 2006 Last revised: 11 Jun 2008

See all articles by Harikesh Nair

Harikesh Nair

Stanford University - Graduate School of Business

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Pradeep K. Chintagunta

University of Chicago

Date Written: July 2004

Abstract

Discrete choice models of aggregate demand, such as the random coefficients logit, can handle large differentiated products categories parsimoniously while still providing flexible substitution patterns. However, the discrete choice assumption may not be appropriate for many categories in which we expect consumers may purchase more than one unit of the selected item. We derive the aggregate demand system corresponding to a discrete/continuous household-level model of demand. We also propose a Method-of-Simulated-Moments procedure that provides consistent estimates of the structural parameters when only aggregate data are available. The procedure also enables the researcher to control both for the potential endogeneity of marketing variables as well as potential heterogeneity in consumer tastes. Using our aggregate estimates, we can measure the decomposition of price elasticities into incidence, brand choice and purchase quantity components. We also propose several empirical tests to assess the validity of the discrete/continuous demand system versus the logit model. In several simulation experiments, we demonstrate the robustness of this model across datasets in which quantity choices may or may not be important. Our empirical calibration to store-level data in the refrigerated orange juice category indicates a considerable improvement in fit of the observed aggregate sales using the discrete/continuous model.

Keywords: Discrete/continuous demand, logit demand system, aggregate data, price endogeneity, primary and secondary demand, econometrics, economic policy, empirical industrial organization, market research, marketing strategy, product management

JEL Classification: C10, L10, M3, O32

Suggested Citation

Nair, Harikesh and Dube, Jean-Pierre H. and Chintagunta, Pradeep K., Accounting for Primary and Secondary Demand Effects with Aggregate Data (July 2004). Stanford University Graduate School of Business Research Paper No. 1949. Available at SSRN: https://ssrn.com/abstract=945416 or http://dx.doi.org/10.2139/ssrn.945416

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

Jean-Pierre H. Dube

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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