Generalized Reverse Discrete Choice Models

Marketing practitioners and academics have shown a keen interest in the processes that drive consumers’ choices since the early work of Guadagni and Little (1982). Over the past decade or so, a number of alternative models have been proposed, implemented and analyzed. The common behavioral assumption that underlines these models of discrete choice is random utility maximization (RUM). The RUM assumption, in its simplest form, posits that a consumer with a finite set of brands to choose from chooses the brand that gives her the maximum amount of utility. An alternative approach would be to assume that consumers choose the alternative that offers them the least disutility. Our paper proposes and tests a broad class of generalized extreme value models based on this hypothesis. We model the decision process of the consumer the assumption random disutility minimization (RDM) and derive a new class of discrete choice models based on this assumption. Our findings reveal that there are significant theoretical and econometric differences between the discrete choice models derived from a RUM framework and the RDM framework proposed in this paper. On the theoretical front we find that the class of discrete choice models based on the assumption of disutility minimization is structurally different from the models in the literature. Further, the models in this class are available in closed form and exhibit the same flexibility as the GEV models proposed by McFadden (1978). In fact, the number of parameters are identical to and have the same interpretation as those obtained via RUM based GEV models. In addition to the theoretical differences we also uncover significant empirical insights. With the computing effort and time for both models being roughly the same this new set of models offers marketing academics and researchers a viable new tool with which to investigate discrete choice behavior.JEL Classification: C25, C35, M37, D12     

The Effect of Attribute Variation on Consumer Choice Consistency

We study the effect of shifts in attribute level differences on consumer choice consistency. Choice consistency is measured as the variance of the random error component in the consumer utility function: the smaller this variance, the higher choice consistency. We hypothesize that due to increased choice difficulty, choice consistency decreases if attribute level differences increase while average utility level differences between alternatives remain the same. In our empirical illustration we focus on the impact of price level shifts on choice consistency in conjoint choice experiments. Our results show that choice consistency decreases as price level differences increase and absolute price levels increase.     

Consumer heterogeneity in the longer-term effects of price promotions

While a significant literature has emerged recently on the longer-term effects of price promotions, as inferred from persistence models, there is very little if any attention paid to whether such longer-term effects vary across different types of consumers. This paper takes a first step in that direction by exploring whether the adjustment, permanent, and total effects of price promotions, and the duration of the adjustment period, differ between consumers segmented based on their usage rates in a product category and their loyalty to a brand. We also investigate whether such consumer segmentation will improve the forecasting performance of persistence models at both product category and brand levels. Expectations are developed based on consumer behavior theory on various effects of price promotions, such as the post-deal trough, the mere purchase effect, the promotion usage effect, and responsiveness to competitor's reactions. Evidence from household-level supermarket scanner data on four product categories is provided. We find substantial differences between consumer segments and provide insights on how managers can increase the longer-term effectiveness of price promotions by targeting each consumer segment with a different promotion program. In addition, consumer segmentation is found to significantly improve the forecasting performance of the persistence model for two of the four product categories. For the other two product categories, consumer segmentation provides forecasting performance similar to that obtained from aggregate-level persistence models.     

Recent Advances in Structural Econometric Modeling: Dynamics, Product Positioning and Entry

In the empirical analysis of consumer markets, recent literature has begun to explore the dynamics in both consumer decisions as well as in firms' marketing policies. Other research has begun to explore the strategic aspects of product line design in a competitive environment. In both cases, structural models have given us new insights into consumer and firm behavior. For example, incorporating consumer and firm dynamics may help explain patterns in our data that are not well-captured by static models. Similarly, the strategic aspects of firm entry and product-positioning may be intrinsically linked to firm conduct and the intensity of competition in a market. Structural analysis of these consumer and firm decisions raise a number of substantial computational challenges. We discuss the computational challenges as well as specific empirical applications. The discussions are based on the session “Structural Models of Strategic Choice” from the 2004 Choice Symposium.     

A New Look at Constructed Choice Processes

Normative models of choice assert axiomatically that preferences are consistent, coherent, and determined only by relevant alternatives. In contrast to this classical economic perspective, behavioral models derived from research in psychology and consumer behavior assert that preferences are not guided by an internal, stable utility function but are constructed during the choice process. The current paper is based on a session on constructed choice processes (CCP) at the 2004 Choice Symposium that focused on how the standard CCP model can be enriched by bringing theories and tools from modern research in social cognition to bear on choice phenomenon. The richer conceptual framework presented by new, currently unpublished empirical work provides a novel perspective on choice construction by integrating the roles of subjective construal, experiential information, attribution, goals, and satisfaction in understanding preference construction processes in choice.     

Decision Strategy and Structure in Households: A “Groups” Perspective

From a practical perspective, (arguably) most consumer decisions are not made in isolation of the households in which consumers are inserted, yet we commonly treat them econometrically as if they were. The purpose of this workshop was to take some initial steps in defining needed research in household decision making that structurally accounts for goal sharing, utility interdependence, taste heterogeneity, choice set formation, power structures, group size and composition, and so forth. We also considered conditions under which aggregation of tastes, utility and choices might occur and make sense from both behavioral and modeling perspectives.     

An Analysis of Assortment Choice in Grocery Retailing

Consumers in grocery retailing commonly buy bundles of products to accommodate current and future consumption. When all products in a particular bundle share common attributes (and are selected from the same product category), the consumer is said to assemble an assortment. This research examines the impact of assortment variety on the assortment choice process. In particular, we test the prediction that consumers demand less variety for higher quality items. To investigate this relationship, we employ a flexible choice model, suitable for the analysis of assortment choice. The model, based upon the assumption that the utility of purchase of one item in an assortment depends upon the set of items already selected, allows for a general utility structure across the assortment items. We apply the model to household assortment choice histories from the yogurt product category. Substantively, we show that yogurt choice is affected by brand quality perceptions (quality-tier competition). Moreover, we show that reaction to reductions in variety (number of yogurt flavors) is mediated by brand quality perceptions. Taken together, these empirical facts paint a picture of a consumer who is willing to trade-off variety against product quality in assortment choice.     

Canonical Correlation Analysis and Wiener-Granger Causality Tests: Useful Tools for the Specification of VAR Models

Dynamic multivariate models have become popular in analyzing the behavior of competitive marketing systems because they are capable of incorporating all the relationships in a competitive marketing environment. In this paper we consider VAR models, the most frequently used dynamic multivariate models. The drawback of VAR models is that a large number of parameters have to be estimated. The problem has been addressed in several articles and the usual solution is to treat only the variables of interest as endogenous while the other variables are usually included exogenously without dynamic effects. This treatment imposes restrictions on the marketing system, which requires preliminary analysis. We propose to use canonical correlation for this purpose. Canonical correlation analysis and its associated Wiener-Granger causality testing based on the canonical correlation coefficients are useful tools to test the existence of structural relationships between (lagged) consumer response and (lagged) marketing instruments. The tools are applied on data of market shares and marketing instruments in a market of a frequently purchased consumer goods.     

The interrelationships between brand and channel choice

We propose a framework for the joint study of the consumer’s decision of where to buy and what to buy. The framework is rooted in utility theory where the utility is for a particular channel/brand combination. The framework contains firm actions, the consumer search process, the choice process, and consumer learning. We develop research questions within each of these areas. We then discuss methodological issues pertaining to the use of experimentation and econometrics. Our framework suggests that brand and channel choices are closely intertwined, and therefore studying them jointly will reveal a deeper understanding of consumer decision making in the modern marketing environment.     

Modeling preference evolution in discrete choice models: A Bayesian state-space approach

We develop discrete choice models that account for parameter driven preference dynamics. Choice model parameters may change over time because of shifting market conditions or due to changes in attribute levels over time or because of consumer learning. In this paper we show how such preference evolution can be modeled using hierarchial Bayesian state space models of discrete choice. The main feature of our approach is that it allows for the simultaneous incorporation of multiple sources of preference and choice dynamics. We show how the state space approach can include state dependence, unobserved heterogeneity, and more importantly, temporal variability in preferences using a correlated sequence of population distributions. The proposed model is very general and nests commonly used choice models in the literature as special cases. We use Markov chain monte carlo methods for estimating model parameters and apply our methodology to a scanner data set containing household brand choices over an eight-year period. Our analysis indicates that preferences exhibit significant variation over the time-span of the data and that incorporating time-variation in parameters is crucial for appropriate inferences regarding the magnitude and evolution of choice elasticities. We also find that models that ignore time variation in parameters can yield misleading inferences about the impact of causal variables. This paper is based on the first author's doctoral dissertation.     

Perspectives on Multiple Category Choice

Multiple category choice is a decision process in which an individualselects a number of goods, all of which are nonsubstitutable with respect toconsumption. Choices can be made either simultaneously or sequentially. Thekey feature of multiple category choice is the treatment of the choices asinterrelated because each item in the final collection of goods contributesto the achievement of a common behavioral goal. We discuss current andpotential applications of psychology, economics and consumer choice theoryin developing models of multiple category choice.     

Behavioral models of managerial decision-making

This paper reviews the literature that applies behavioral economic models to managerial decisions. It organizes the literature into research that focuses on alternative utility functions and research that focuses on non-equilibrium models. Generally, behavioral models have seen less application to manager decisions than to consumer decisions and therefore there are many opportunities to develop new theoretical models, new laboratory experiments, and new field applications. The application of these models to field data is particularly underdeveloped.     

A model of consumer information search and online network externalities

This article looks at a consumer who faces a choice between two sources of information: conventional and online. The online source is different from the conventional one because consumers care about how many people are using it along with them. Generally, the more users the better (positive network externality), but, on the other hand, the presence of more users implies a reduction of available capacity, about which consumers also care. We assume that consumers maximize their utility, which is modeled as a function of all other consumption, knowledge, and network externalities. Knowledge is conceptualized as a function of the amount of information spent both on the online network and on conventional sources. Since consumer information searches may differ according to demographic differences, this may result in consumers’ differences in their usage of online networks and conventional sources. We include these externalities in our model to better understand consumer choice behavior for the online network. The consumer utility function is estimated by using the model estimation method developed in this article, since the interactions implied by the consumer utility function are more complex than one could hope to estimate econometrically. We use survey data to regress the demand for online information depending on income, education, the number of users, and remaining capacity. We introduce a methodology to simulate how consumers’ representative utilities will behave in different network environments and derive implications for online network suppliers.     

Simulated Negotiations in the Hiring of a Salesforce Manager: Tests of Two-Person Bargaining Solutions

This paper examines the ability to predict bargaining outcomes consistent with Nash, Kalai-Smorodinsky, and Gupta-Livne bargaining models as well as two heuristic solutions based on interpersonal (cardinal) comparisons of utility. Equal earning and equal loss solutions are developed from bargainers' multi-attribute utility functions. An experimental test of these bargaining solutions is conducted for simulated negotiations between a representative of sales force management and a representative of sales force employees over the hire of a regional sales manager. Results show that proportional (Kalai-Smorodinsky) solutions are generally more likely when bargaining is conducted in attribute space, and equal loss solutions are more likely in utility space.     

Lost and found: Individual differences in propensity to process visual elements of persuasion

Visual processing style, defined as the relative propensity to engage in visual processing rather than verbal processing, is an individual difference variable that has been frequently investigated in the consumer psychology literature. Surprisingly, numerous studies have reported no relationship between visual processing style and viewer responses to visual elements of persuasion. We argue that this accumulation of null results is due to untenable historical theoretical assumptions that underlie the construct, along with methodological problems that are inevitably brought about by those theoretical assumptions. We reconceptualize visual processing style and test an alternative empirical operationalization of it. Using both new data and a reanalysis of data published in the Journal of Consumer Research, we find the old approach yields null results, but we find the new approach yields the expected results. The new approach reinstates the utility of incorporating propensity to engage in visual processing as an individual difference variable into consumer psychology models of visual persuasion, and it reinstates a powerful individual difference variable that can help push forward the investigation of the unique aspects of visual persuasion.     

What Makes Consumers Willing to Pay for Online Services? Discovering Consumer Opinions and Determinant Factors on Charged Online Services

ABSTRACT

Recently, more and more service e-businesses began to charge their consumers on the services provided to assure revenues for their survival. An understanding of consumer opinions on and behaviors toward the charged online services is critical to successful business models for service e-business. Through survey data analyses, the exploratory study reported herein attempts to discover consumer opinions and behaviors regarding charged online services. The findings of this study would contribute effectively to the formulation and implementation of sustainable business models for e-businesses in the service sector.     

Main-format dominance in consumers’ FMCG cross-format shopping patterns

Although cross-format patronage has become a common phenomenon in markets for Fast Moving Consumer Goods (FMCG), research on consumers’ specific cross-format combinations is limited. We study such shopping patterns by focusing on retail format utilization. A qualitative pre-study demonstrates consumers’ patronizing combinations of typical retail formats in FMCG with main-format usage and provides underlying differences in consumers’ perceived shopping utility for cross-format selection, which results from their utilized main-format. Our quantitative study reveals three clusters with main-format dominance, that is, mainly supermarket, discount store, and hypermarket shoppers complementarily utilizing fill-in formats to a much lesser extent. Whereas we found high inter-format loyalty in each consumer group, intra-format loyalty significantly varies between clusters. ANOVA and post hoc-tests concerning perceived shopping utility dimensions show that consumers’ perceived acquisition utility rather than perceived transaction costs significantly differs between consumer groups.     

A Meta-analysis of Loss Aversion in Product Choice

Loss aversion is a behavioral phenomenon with game-changing implications for economic theory and practice. We conduct a meta-analysis of 33 studies (providing 109 observations) investigating loss aversion in random utility models of brand choice. Specifically, we use multilevel modeling techniques to examine potential moderators of preference asymmetries as well as the variability of loss-aversion effects within and between studies. We find that loss aversion is manifest in product choice, but that it exhibits substantial variation across research contexts. Product-related variables (e.g., the category type), consumer characteristics (e.g., reference-point mechanisms), and particularly methodological decisions (e.g., model specifications) determine the observed degree of loss–gain disparity. Practical implications of the specific findings and opportunities for future research are discussed.     

Extremely thin models in print ads: The dark sides

To appeal to consumers as social beings, advertisers include social settings and human images in commercial messages. Extant empirical research shows that thin models are perceived as more attractive and that the use of attractive models results in higher ad effectiveness. However, this study offers empirical evidence of ‘dark sides’ of extremely thin models, such that they harm advertising performance. The negative effects of extremely thin models stem from their influence on consumers' psychological well-being, as well as their ethical judgements of the advertisement. Respondents in this study also regard an extremely thin model as less attractive than a more average model. These results suggest that organizations should reconsider the portrayal of extremely thin models in their promotional messages and, more generally, consider consumer ethics when developing marketing communication messages.     

A higher-order model of consumer brand engagement and its impact on loyalty intentions

Consumer brand engagement is increasingly gaining popularity among practitioners and academics as a prominent consumer-brand relationship construct. The emergent literature on consumer brand engagement, largely conceptual, offers various definitions of the construct, though without much consensus. We offer a novel higher-order model of consumer brand engagement that we derive from organizational psychology. We adapt the concept of employee engagement and examine its factorial validity in a consumer-brand relationship context, defining consumer brand engagement as consumers' positive, fulfilling, brand-use-related state of mind that is characterized by vigor, dedication and absorption. We develop and empirically test a three-dimensional model of brand engagement, outlining relevant antecedents and outcomes. More importantly, we assess the managerial utility of consumer brand engagement by examining its impact on consumer loyalty intentions. We additionally compare the explanatory capability of brand engagement relative to traditional consumer judgments of value, quality and satisfaction. A survey of 408 mobile phone consumers from India provided data for empirical testing. The results support the three-dimensional factor structure of consumer brand engagement. Brand engagement not only exerts a significant impact on loyalty intentions, but also explains significantly more variation in the outcome in addition to the variation explained jointly by value, quality and satisfaction. Theoretically, we offer a holistic multi-dimensional measure of consumer brand engagement, and examine key nomological relationships. Managerially, we demonstrate the explanatory capability of brand engagement in explaining consumer loyalty intentions, offering a useful tool in the relationship-building repertoire of managers.