Showing papers in "Marketing Science in 1984"

Market Segmentation, Self-Selection, and Product Line Design

Abstract: The purpose of this paper is to develop a theory of market segmentation based on consumer self-selection. The extant theory is based on the third-degree price discrimination model of Pigou, central assumptions of which are that the firm can directly address individual segments and isolate them. By using consumer self-selection, I am relaxing these assumptions. In the context of a monopolist designing a product line, I show that this relaxation has significant implications for how the products and prices are chosen and what they look like. In particular, segments may be aggregated even though there are no economies of scale. Furthermore, consumer self-selection enables us to model “cannibalization” and competition among firms.

A Price Discrimination Theory of Coupons

Abstract: The objective of this paper is to analyze the consumer's decision in electing to use cents-off coupons distributed by manufacturers of consumer products. Arguing that the decision to use coupons is based on the tradeoff between costs of using coupons and the savings obtained, it is shown that coupons can serve as a price discrimination device to provide a lower price to a particular segment of consumers. Based on a price theoretic model, it is shown that the users of coupons are more price elastic than nonusers of coupons and that the opportunity cost of time and other household resource variables are determinant factors in consumers' decisions. Implications derived from the model are tested using diary panel data.

Variety Seeking Through Brand Switching

Abstract: A concept of variety seeking behavior is modeled as a stochastic brand choice model. The model yields a measure of variety seeking for each individual consumer. Panel data for 28 products are analyzed for each household and the possibility of market segmentation by variety seeking behavior is explored.

Testing Competitive Market Structures

Abstract: An accurate understanding of the structure of competition is important in the formulation of many marketing strategies. For example, in new product launch, product reformulation, or positioning decisions, the strategist wants to know which of his competitors will be most affected and hence most likely to respond. Many marketing science models have been proposed to identify market structure. In this paper we examine the managerial problem and propose a criterion by which to judge an identified market structure. Basically, our criterion is a quantification of the intuitive managerial criterion that a “submarket” is a useful conceptualization if it identifies which products are most likely to be affected by “our” marketing strategies. We formalize this criterion within the structure of classical hypothesis testing so that a marketing scientist can use statistical statements to evaluate a market structure identified by: 1 behavioral hypotheses, 2 managerial intuition, or 3 market structure identification algorithms. Mathematically, our criterion is based on probabilities of switching to products in the situation where an individual's most preferred product is not available. 'Submarkets' are said to exist when consumers are statistically more likely to buy again in that 'submarket' than would be predicted based on an aggregate “constant ratio” model. For example, product attributes e.g., brand, form, size, use situations e.g., coffee in the morning versus coffee at dinner, and user characteristics e.g., heavy versus light users are specified as hypotheses for testing alternate competitive structures. Measurement and estimation procedures are described and a convergent approach is illustrated. An application of the methodology to the coffee market is presented and managerial implications of six other applications are described briefly.

Optimal Pricing and Advertising Policies for New Product Oligopoly Models

Abstract: In this paper our previous work on monopoly and oligopoly new product models is extended by the addition of pricing as well as advertising control variables. These models contain Bass's demand growth model, and the Vidale-Wolfe and Ozga advertising models, as well as the production learning curve model and an exponential demand function. The problem of characterizing an optimal pricing and advertising policy over time is an important question in the field of marketing as well as in the areas of business policy and competitive economics. These questions are particularly important during the introductory period of a new product, when the effects of the learning curve phenomenon and market saturation are most pronounced. We consider first the monopoly case with linear advertising cost, exponential demand, and three different pricing rules: the optimal variable pricing, the instantaneous marginal pricing, and the optimal constant pricing rules. Several theoretical results are established for these rules including the facts that the instantaneous marginal pricing rule is a myopic version of the optimal pricing rule and the optimal constant pricing rule is a weighted average over time of the instantaneous marginal pricing rule. Another surprising result is that, after the market is at least half saturated, a pulse of advertising must be preceded by a significant drop in price. Numerical solutions of a number of examples are discussed. Oligopolistic models are analyzed as nonzero-sum differential games in the rest of the paper. The state and adjoint equations are easy to write down, but impossible to solve in closed form. Hence we describe how to reformulate these models as discrete differential games, and give a numerical algorithm for finding open loop Nash solutions. The latter was used to solve three triopoly models. In each case it was found that optimal prices and advertising rates start high and steadily decline.

An Investigation into the Order of the Brand Choice Process

Abstract: This paper investigates the order of the brand choice process at the individual family level using a variety of tests: t, likelihood ratio, binomial runs, and multinomial runs tests The test of stationarity developed permits separate analyses for stationary and nonstationary purchase sequences Our analyses indicate that the purchase sequences of a majority of stationary consumers are consistent with the zero-order assumption This result is observed for all the nine frequently-bought packaged goods studied with the use of panel data and for a product category soft drinks using experimental data

An Audience Flow Model of Television Viewing Choice

Abstract: A model for the prediction and explanation of individual television viewing choice is presented, incorporating considerations of utility, audience flow, and audience segmentation. The proposed model provides a quantifiably explicit theoretical explanation of television viewing choice, and its validation on large-sample network viewing data provides a baseline degree of accuracy against which the performance of future television viewing models may be compared. Of direct relevance to advertising agencies and the television networks is the suitability of the model for estimating the comparative impact of alternative programs on the audience size and composition of competing programs in the immediate and subsequent time slots.

A Normative Model of Consumer Information Processing

Abstract: A model of information search is proposed which assumes that a consumer chooses the next piece of information so as to maximize his expected value of sample information. The cost of processing, the perceived correlation between attributes, and the perceived importance of attributes would all affect information choice. Three sets of propositions are derived. The model is also estimated and tested for subjects performing an information display board task.

An Empirical Comparison of Awareness Forecasting Models of New Product Introduction

Abstract: Five awareness forecasting models embedded in their respective new product introduction models are compared. Conditions which govern the differences in the awareness estimates provided by the various models are delineated. Managerial implications of the results are discussed.

Targeting the Switchable Industrial Customer

Abstract: This article presents a new approach to target marketing. An industrial market for electrical equipment is segmented on the basis of the strength of current preferences as defined by the probabilities of selecting the various suppliers. A modification of a disaggregate attribute choice model logit is used to identify the firm's “switchable” customers. The “switchable” customers are then targeted by direct personalized mail and visits by a “missionary” sales force. A major supplier of large-scale electrical equipment utilized this methodology with impressive sales results.

Technical Note---A Pure Birth Model of Optimal Advertising with Word-of-Mouth

Abstract: A stochastic, dynamic model of advertising, which incorporates both advertising and word-of-mouth effects, is formulated. The time between the acquisition of new customers is assumed to be random. The distribution of the time until the firm obtains a new customer depends upon the rate of advertising expenditures and upon a word-of-mouth parameter. The problem of choosing the rate of advertising expenditures so as to maximize long-run expected profit is formulated as a continuous-time Markov decision chain. The impact of changes in various parameters of the model on optimal advertising decisions is studied.

Assessing the Influence of Campaign Expenditures on Voting Behavior with a Comprehensive Electoral Market Model

Abstract: This paper extends previous single equation econometric modeling efforts of the “sales-advertising” relationship in elections. Operating within the perspective of the general demand context of voting behavior, it develops a comprehensive electoral market model that takes account of potential simultaneous relationships among votes cast, campaign expenditures, and voting participation turnout. The model is estimated using 3SLS techniques with aggregate electoral district data from each of eight Canadian provincial elections. The model appears to yield consistent and therefore generalizable empirical results across the eight election events. Chief among the empirical results is the expected relationship between campaign efforts and voting behavior: “own” communications efforts as proxied by campaign expenditures have a positive impact on votes received, while competitive communications efforts draw votes away from a candidate.

Toward a Methodology for Measuring Advertising Copy Effects

Abstract: A model is proposed to estimate the impact of advertising copies on the relationship between the frequency of exposure to an advertisement and the criterion measures of attitude or behavioral intentions. The model is used in the context of copy testing. It is different from existing copy testing methods on several aspects, the most important of which are that various constructs known to be important are integrated, and the model offers diagnostic information as to areas where the copy can be improved.

An MDI Model and an Algorithm for Composite Hypotheses Testing and Estimation in Marketing

Abstract: This paper indicates how an information theoretic approach via the MDI minimum discrimination information statistic can be used to help provide a uniform approach to both statistical testing and estimation in various kinds of marketing analyses. Extensions to constrained versions of the MDI statistic also make it possible to test the consistency of market information with management plans or policies that can be represented in “external” constraints, i.e., constraints formulated without reference to the data base, and to estimate their impact on the market. Composite hypotheses, which are difficult to deal with by the more customary methods used in market research, can be dealt with naturally and easily via these MDI approaches. Basically MDI is more efficient than classical approaches because distribution estimation and hyopthesis testing are done simultaneously and the resulting estimates obtain regardless of the conclusion of the test. Numerical illustrations are supplied and discussed. Recent developments in mathematical programming duality theory and methods, which are also pertinent, are briefly examined for their bearing on still further possibilities for constrained MDI modeling.

A Market Dynamics Model for New Industrial Products and Its Application

Abstract: New product planning models attempt to predict the market consequences of product line and product design decisions. One output of such models, especially those driven by subjective or market research data, is usually theoretical market shares based upon consumer preferences under idealized conditions. This paper describes a class of models that bridge the gap between such theoretical market shares and dynamic sales forecasts. This model accounts for differences in customer awareness of different products, for differences in product announcement dates, for differences in product availability, for differences in marketing efforts, for customer inertia and for customer purchasing delays. The paper describes specific details of such a model used in a system developed for market analysis of high speed nonimpact computer printers.

Prediction of Individual Buying Behavior: A Poisson-Bernoulli Model with Arbitrary Heterogeneity

Abstract: Patterns of customer purchases are often modeled as discrete behavioral events following some probability law. These stochastic models have been applied separately to the phenomena of product class purchase incidence and brand choice conditional on the products being purchased. Most of these models are probability mixture models where the parameters of an individual customer model vary across the population according to some distribution. This paper proposes a simple model of purchase behavior at the individual level, Poisson λ product purchases and Bernoulli p brand choices, so that λ and p characterise each customer. However, λ and p may vary jointly across the population in an arbitrary fashion. Therefore, purchase incidence and brand choice are treated together making no assumptions about the dependence between them. This generality is obtained at the cost of efficiency but enables us to focus on the individual behavior. Estimators with known asymptotic properties are developed for predicting future purchasing behavior of individuals conditional on their past purchasing behavior. These predictions of future purchases, at brand and product levels, are of interest to marketing managers. For example, what is the expected number of brand or product purchases in period 2 for the group of customers that made x brand and n product purchases in period 1? Apart from the basic insights provided by such predictions, they are particularly useful in evaluating the impact of marketing efforts. The model and the estimation results are applied to a frequently purchased product and compared with other stochastic approaches. While this paper focuses on buying behavior, the model is applicable to accidents, direct mail purchases and other random events.

Technical Note---Factors Influencing the Selection of Preference Model Form for Continuous Utility Functions in Conjoint Analysis

Abstract: In conjoint analysis, a consumer's utility function for a continuous attribute is usually estimated using a part worth function. However, one may also use continuous functions. The purpose of the paper is to investigate through simulation the combined influence of the number of degrees of freedom, the nature of the “true” utility function and the amount of error in the data on the selection of a utility function. The focus is on functions that are known or expected to be monotone within the range of attribute levels of interest. One can then choose among linear, quadratic and part worth functions. The results show a that estimation procedures with monotonicity constraints should be used, and b that it is best to use quadratic or part worth functions rather than linear functions to minimize potential losses in predictive validity.

Assessing Validity and Test-Retest Reliability for “Pick K of N” Data

Abstract: A mixed binomial error model is proposed which permits the evaluation of validity and test-retest reliability when individuals are asked to pick K of N objects. The approach explicitly incorporates the effect of guessing as well as the respondent's true discrimination ability, and recognizes that that ability will vary across respondents. So, given the choices made by a set of individuals, we are interested in estimating the distribution of true ability over the population. To evaluate the criterion-related validity each person's K choices of N objects are compared to an objective standard---the K “correct” choices. For the primary model considered here these data can be summarized by the distribution, over individuals, of the number of “matches” or agreements between a person's choices and the objective criterion. A similar procedure is used for evaluating test-retest reliability. The distribution for the number of matches is again used; but here the matches will refer to agreement between the individual's K choices on this occasion, and the K choices made by that individual on a previous occasion. The use of these reliability and validity results to address specific marketing questions, such as the segmentability of a market or the effect of advertising on perception and attitudes, is also discussed.

A Comment

Abstract: “An Audience Flow Model of Television Viewing Choice” by Rust and Alpert this issue, pp. 113--124 does indeed represent a contribution to the marketing literature. Furthermore, it represents an important step in the process of developing a better understanding of a significant and practical marketing issue: the selection---in advance---of specific advertising vehicles.

Response---On Establishing a Dialogue in Television Viewing Research

Abstract: Response to the commentary Pringle, L. G. 1984. A Comment. Marketing Sci.3 125--126 on author's paper Rust, R. T., M. I. Alpert. 1984. An audience flow model of television viewing choice. Marketing Sci.3 113--124.