Publication: The Price Consideration Model of Brand Choice

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Title The Price Consideration Model of Brand Choice
Authors/Editors* Andrew Ching, Tülin Erdem, Michael Keane
Where published* Journal of Applied Econometrics
How published* Journal
Year* 2009
Volume 24
Number 3
Pages 393-420
Publisher Wiley InterScience
Keywords Brand Choice Models, Simulated Maximum Likelihood
The workhorse brand choice models in marketing are the multinomial logit (MNL) and nested multinomial logit (NMNL). These models place strong restrictions on how brand share and purchase incidence price elasticities are related. They predict market shares well, but not inter-purchase spell lengths. In this paper, we propose a new model of brand choice, the “price consideration” (PC) model, that allows more flexibility in the relation between purchase incidence and brand choice elasticities. In the PC model, consumers do not observe prices in each period. Every week, a consumer decides whether to consider a category. Only then does he/she look at prices and decide whether and what to buy. Using Nielsen scanner data on peanut butter and ketchup, we show the PC model fits much better than MNL or NMNL. Simulations reveal the reason: the PC model provides a vastly superior fit to inter-purchase spells.
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