Modeling whether, what and how much to buy the right way: An empirical analysis with implications for model building.

Publisher:
Springer
Publication Type:
Journal Article
Citation:
Review of Managerial Science, 2010, 4 (3), pp. 171 - 199
Issue Date:
2010-01
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Whether, what and how much to buy are central decisions in consumer goods markets. Marketing research commonly uses a sequential approach where quantity decision is conditional on purchase incidence and brand choice (e.g., Ailawadi et al. in J Mark Res 44:450467, 2007). This approach assumes separability between decisions and suffers from selectivity bias. The bias can be overcome by explicitly controlling for it (e.g., Zhang et al. in Rev Mark Sci 3(1), 2005) or by using one unifying utility function, a method considered ``state of the art in analyzing purchase behavior in a single product category (e.g., Song and Chintagunta in J Mark Res 44(4):595612, 2007). However, this latter method puts restrictive assumptions on the influence of prices on choices, which may affect managerial implications derived from the model results. This study investigates the effect of selectivity bias by comparing the sequential approachwith and without explicitly controlling for endogeneity biasto the unifying utility function approach. Based on household panel data from three categories, we illustrate the extent to which managerial implications from these frameworks differ. We show that the superiority of one framework versus the other depends on the specific category and its characteristics. The managerial implications of using the ``wrong framework are demonstrated by conducting two simulation studies; these show that price elasticities substantially deviate across frameworks.
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