Showing papers in "Marketing Science in 1986"

The Choice Theory Approach to Market Research

Abstract: This paper surveys economic choice theory, stressing developments that permit use of data from psychometric and conjoint experiments to produce market demand forecasts. Alternatives to the widely used multinomial logit model are summarized, and a new method for estimating multinomial probits is described. An integration of choice models with attitudinal scaling and perceptual mapping, within a latent variable system, is described. Estimation of such systems under either “random effects” or “fixed effects” descriptions of heterogeneity across individuals is discussed. Issues in the use of choice models to describe responses from conjoint experiments are presented. New regression diagnostic tests for the consistency of multinomial logit representations are discussed.

Technical Note---Nonlinear Least Squares Estimation of New Product Diffusion Models

Abstract: Schmittlein and Mahajan Schmittlein, D. C., V. Mahajan. 1982. Maximum likelihood estimation for an innovation diffusion model of new product acceptance. Marketing Sci.1 Winter 57--78. made an important improvement in the estimation of the Bass Bass, F. M. 1969. A new product growth model for consumer durables. Management Sci.15 January 215--227. diffusion model by appropriately aggregating the continuous time model over the time intervals represented by the data. However, by restricting consideration to only sampling errors and ignoring all other errors such as the effects of excluded marketing variables, their Maximum Likelihood Estimation MLE seriously underestimates the standard errors of the estimated parameters. This note uses an additive error term to model sampling and other errors in the Schmittlein and Mahajan formulation. The proposed Nonlinear Least Squares NLS approach produces valid standard error estimates. The fit and the predictive validity are roughly comparable for the two approaches. Although the empirical applications reported in this paper are in the context of the Bass diffusion model, the NLS approach is also applicable to other diffusion models for which cumulative adoption can be expressed as an explicit function of time.

Advertising Pulsing Policies for Generating Awareness for New Products

Abstract: The question of whether a pulsed advertising policy is superior to an even policy constant spending over time is of practical relevance to both advertising practitioners and model builders. This paper presents an analytical model that can be used to analyze the impact of the various pulsing and even policies on awareness. In addition to establishing the relationships between the various advertising policies analytically, an application of the proposed model to the actual Zielske's data is included.

Salesforce Compensation Plans in Environments with Asymmetric Information

Abstract: In this paper, we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans. Although such contractual arrangements are not commonly used in the industry, they have been introduced and implemented by firms such as IBM and St. Regis Paper. As in our previous work on salesforce compensation plans Basu, Lal, Srinivasan, and Staelin [Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci.4 Fall 267--291.] we use an agency-theory framework. In this paper, we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans. We also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by Basu, Lal, Srinivasan, and Staelin Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci.4 Fall 267--291. is still optimal. Insights gained from the analyses are discussed in the context of an existing compensation scheme.

The Impact of Competitive Entry in a Developing Market Upon Dynamic Pricing Strategies

Abstract: This paper analyzes dynamic pricing strategies for new durable goods in a two-period context. The first period is characterized as a monopoly market structure for a new product having dynamic demand. The second period begins when a new firm enters the market, and thereby changes the market structure to a duopolistic one. We begin by analyzing the pricing strategies of three types of monopolists: nonmyopic, myopic and “surprised.” A nonmyopic monopolist is a first entrant who perfectly predicts the competitive entry. A myopic monopolist totally discounts the duopolistic period, and a “surprised” monopolist is a first entrant who has the longer time horizon of the nonmyopic monopolist, but who does not foresee the competitive entry. Our results indicate that the nature of these pricing strategies may be quite different. It is optimal for the nonmyopic firm to price its product at a higher level than the myopic monopolist. Additional results indicate under what circumstances the “surprised” monopolist will p...

A constrained unfolding methodology for product positioning

Abstract: This paper presents a recently developed unfolding methodology for analyzing preferential/dominance data that addresses the product positioning/repositioning decision problem of product (re)design and targeting by relating brand and consumer characteristics explicitly to perceptual brand locations and ideal points respectively. The methodology and associated algorithm are applied to a set of preference data for twelve models of residential communication devices. Various managerial implications of the model for product positioning and optimal product design are illustrated and discussed.

Technical Note---Delegating Pricing Responsibility to the Salesforce

Abstract: In this paper, we use an agency theory framework to address the issue of delegating pricing responsibility to the salesperson. In this analysis, it is shown that delegating the pricing responsibility to the salesperson is as profitable as centralization when the salesperson and the sales manager have identical information about the selling environment; but delegation may be more profitable when the saleperson's information is superior to that of the sales manager's. It is also argued that this characteristic is typical of market conditions where we observe delegation of such responsibility in cases identified by Weinberg Weinberg, C. B. 1975. An optimal commission plan for salesman's control over price. Management Sci.21 8, April 937--943. and Stephenson, Cron and Frazier Stephenson, P. R., W. L. Cron, G. Frazier. 1979. Delegating pricing authority to the salesforce: The effects on sales and profit performance. J. Marketing43 April 21--28..

Forecasting New Product Sales from Likelihood of Purchase Ratings

Abstract: This paper compares consumer likelihood of purchase ratings for a proposed new product to their actual purchase behavior after the product was introduced. The ratings were obtained from a mail survey a few weeks before the product was introduced. The analysis leads to a model for forecasting new product sales. The model is supported by both empirical evidence and a reasonable theoretical foundation. In addition to calibrating the relationship between questionnaire ratings and actual purchases, the empirical evidence demonstrates the significant effect of alternative promotion/distribution vehicles on new product sales. The model uses questionnaire data to extend the results of a limited market trial to alternative target markets, product specifications, and prices.

Estimating Continuous Time Advertising-Sales Models

Abstract: This paper develops the advertising-sales model in continuous time with a view to studying the consequences of temporal aggregation for estimation. Difficulties arising from temporal aggregation are shown to correspond to the problem of unobservables. Two previously suggested ways of treating these unobservables due to Blattberg and Jeuland and Bass and Leone are studied in detail focusing on the nature of errors due to each approximation and the aggregation of underlying continuous time stochastic processes. The latter determine the properties of the disturbance terms in the estimating equations. Analytical results are presented and these are examined in light of an empirical application.

A Multivariate Polya Model of Brand Choice and Purchase Incidence

Abstract: In this paper we develop an integrated stochastic model of purchase timing and brand selection which incorporates the influence of marketing mix variables, seasonality and trend, and also allows for various individual choice mechanisms. Our approach rests on the assumptions of a zero-order choice process, a Poisson timing process and purchase rates following a multivariate Gamma Distribution over the population, the scale parameters of which vary according to marketing activities and time. The resulting model is a Multivariate Polya Process, and the distribution of brand choice probabilities turns out to be a Generalized Dirichlet Distribution. Thus, most currently used zero-order models can be considered to be special cases of this approach. Furthermore, we derive a number of market diagnostics which provide insights into market structure and demonstrate the model's use for marketing strategy simulation. Based on extensive testing of the underlying hypotheses we finally validate the model using empirical data and show that it fits the market in question.

Profitable Pricing When Market Segments Overlap

Abstract: In this paper, we analyze profitable pricing strategies when market segments overlap. Overlapping markets are segments that are not perfectly sealed, and leakage between them can occur. Different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low-price market. A monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy. In particular, the monopolist must decide whether to charge a single price or to price differentiate. Conditions are derived under which price differentiation will be the most profitable strategy. When price differentiation is optimal, the equilibrium amount of leakage is determined endogenously. Unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination, we show that zero leakage is not necessary for differential pricing to be optimal, and that...

A Probabilistic Model for the Multidimensional Scaling of Proximity and Preference Data

Abstract: A probabilistic multidimensional scaling model that estimates both location and variance parameters for proximity and preference data is described and compared to a deterministic scaling model. Simulated and empirical choice data are used to compare models. Variance estimates from the probabilistic model are used to test a hypothesis about the homogeneity of stimulus perception under alternative modes of stimulus presentation.

Modeling Response to Advertising and Pricing Changes for “V-8” Cocktail Vegetable Juice

Abstract: This paper is based on a series of studies undertaken for “V-8” Cocktail Vegetable Juice over a five-year period. The studies were a consequence of management questions regarding the effectiveness of a new advertising campaign, the best media mix for this campaign and the apparent “wear-out” of the advertising copy. The studies included controlled experimentation, estimation of advertising response functions, and exploration of price sensitivity following major price increases by “V-8.” It was found that the short-term response to advertising was S-shaped, and that the new creative approach rather than expenditure levels alone accounted for by far the largest component of the impact of advertising on sales. It was also found that for a short period following the major price increases, “V-8” became extremely price sensitive. However, after about six months, the marginal impact of price returned to historical levels. The application of results at Campbell Soup Company, their relationship to the literature and their implications for both researchers and practitioners are discussed.

An Ideal-Point Probabilistic Choice Model for Heterogeneous Preferences

Abstract: This paper presents a new ideal point probabilistic choice model. Unlike the model suggested by Cooper and Nakanishi Cooper, L. G., M. Nakanishi. 1983. Two logit models for external analysis of preferences. Psychometrika48 4 607--619. which attempts to capture choices via a single ideal point, the proposed model, though based on aggregate data, allows for heterogeneity in preferences by estimating a distribution of ideal points. The model accounts for substitutability among choice alternatives and alleviates one of the major sources for the violation of the “Independence from Irrelevant Alternatives” property. It is demonstrated that the final form of the model is a Multinomial Probit, with a covariance matrix that depends on the relative position of the choice alternatives. An empirical application is provided and the resulting parameters are compared to the distributions of ideal points and attribute weights obtained via LINMAP at the individual level and via both the Logit and Probit versions of the model proposed by Cooper and Nakanishi at the aggregate level.

A Nested Logit Model of Space and Water Heat System Choice

Abstract: This paper estimates a nested logit model for space heat and water heat choice using data from the 1980 Pacific Northwest Energy Survey PNW. The estimated structure involves six alternative space heat systems and three alternative water heat fuel types. Operating and capital costs are predicted for each residence using an energy thermal model. To relax the Independence of Irrelevant Alternatives assumption we employ a family of nested logit models. We illustrate the two-step estimation method and use a Lagrange multiplier test for nested logit structure. Finally, we use the estimated models to forecast the market shares of alternative space heat systems under an assumed scenario for the course of relative fuel prices.

The Cost of Simplifying Preference Models

Abstract: Formulas are derived which estimate the accuracy of conjoint analysis in predicting preferences in a validation sample. This accuracy turns out to depend on (among other things) which model of preference is used (e.g., whether interactions are added, whether partworth or linear functions are used). I first show a paradoxical result that simpler models often yield higher predictive accuracy, even when a more complex model is the true one. The reason for this is that the additional parameters of the complex model are estimated with larger variance, which tends to overwhelm the benefits of using the true model. I then shift my criterion from predicting an individual's preferences, to predicting market share, which is of most interest to managers. Under this criterion my conclusions reverse, and I show that a true model (even when complex) is much more likely to yield higher predictive accuracy than a simpler incorrect model. This reverses some previous conclusions in marketing, and confirms that finding the ...

Technical Note---Aggregating Individual Purchases to the Household Level

Abstract: Household level panel data are the input for many types of marketing studies. An interesting, but until now unaddressed, question is what is the effect of aggregating individual members' purchases to the household level. Under “standard” assumptions the answer is unambiguous: the household brand switching pattern looks more zero order than the typical individual family member's behavior. When the standard assumptions are relaxed the overall spirit of the results do not change. These conclusions give comfort to those who use brand switching data to partition product categories. Those looking for variety-seeking behavior from household data are given some cause for concern---as well as reasons for reinterpreting previous studies.

New Product Pricing in Quality Sensitive Markets

Abstract: This paper considers the problem of pricing a new product in a market having competing products of different qualities and market penetration levels, as measured by the cumulative number of units sold. Each customer type selects his optimal product based on maximizing consumer surplus. Pricing policies for a new product are determined for the seller based on cumulative profit maximization without discounting. An example is solved in detail for two demand function forms.

Modeling Choice Strategies for Noncomparable Alternatives

Abstract: Theoretical models are developed for two strategies consumers use to choose among “noncomparable” alternatives. The models view consumers as trading off decision error and processing effort when selecting a decision strategy. The models predict the use of choice strategies, and implicit abstraction processes, for noncomparable alternatives in a number of different circumstances.

Arts Plan: Implementation, Evolution, and Usage

Abstract: This paper discusses the evolutionary development of an implemented, regression-based forecasting system used in planning and managing a schedule of performing arts events. In particular, the changing usage and refinement of this system is examined over a five-year period. One issue addressed is whether the manager, who can accept a regression forecast or revise it, is more accurate than the estimates produced by the regression model alone. The literature on bootstrapping and behavioral decision theory is used in examining the impact of managerial judgment on forecast accuracy. In addition, the paper presents a detailed review of the approaches used over time to revise the original forecasting system and an evaluation of their accuracy.

Discrete Attribute Models of Brand Switching

Abstract: A formal analysis is presented for three general classes of discrete attribute models of brand switching. The analysis focuses on the role of feature importance in specifying transition probabilities. A number of formal properties based on ordinal relations between transition probabilities are defined and each class of models is shown to satisfy a unique subset of the properties. The analytic results reveal important relations between the functional forms of model equations and the managerially-oriented interpretations that are given to the variables in those equations.

Technical Note—Price as an Aspect of Choice in EBA

Abstract: Elimination By Aspects (EBA) is a feature-based, psychological processing model of choice whose potential for customer decision modeling has not been exploited. One of several barriers to econometric application of the theory is the lack of an explicit framework for incorporating quantitative variables, such as price. The present study discusses a theoretical treatment of price within EBA which also serves as a guide to the treatment of other quantitative variables. Specifically, it is proposed that prices be represented as a sequence of nested price feature sets, in which the price feature set of an alternative is included in the price feature sets of all lower priced alternatives. The formal consequences of this representation are examined. Some predictions from the theory are tested on customer choice data.

Reply---Reflections on Advertising Pulsing Policies for Generating Awareness for New Products

Abstract: We are indebted to John Little Little, J. D. C. 1986. Comments. Marketing Sci.5 107--108. and Hugh Zielske Zielske, H. A. 1986. Comments. Marketing Sci.5 109. for their valuable comments on our paper. Some of the comments merit further clarification and our response to these comments is provided below.

Comment---On the Awareness Effects of Mere Distribution

Abstract: Awareness forecasting models, such as those discussed in Mahajan, Muller, and Sharma Mahajan, V., E. Muller, S. Sharma. 1984. An empirical comparison of awareness forecasting models of new product introduction. Marketing Sci.3 Summer 179--197., will be incomplete until they take account of the awareness effects of mere distribution. Distribution acts as both a main effect and as an interactive partner with advertising and promotion in the generation of awareness. Advertising in turn leads to distribution Heeler et al. [Heeler, R. M., M. J. Kearney, B. J. Mehaffey. 1973. Modelling supermarket product selection. J. Marketing Res.10 February 34--37.].

Reply—Reflections on the Cost of Simplifying Preference Models

Abstract: Author's reply to comments by Johnson (Johnson, R. M. 1986. Commentary. Marketing Sci. 5 322.) and Greenberg (Greenberg, M. G. 1986. Commentary. Marketing Sci. 5 320–321.) about this paper (Hagerty, M. R. 1986. The cost of simplifying preference models. Marketing Sci. 5 298–319.).

Technical Note---A Simpler Estimation Procedure for a Micromodeling Approach to the Advertising-Sales Relationship

Abstract: In a well-known article, Blattberg and Jeuland Blattberg, R. C., A. P. Jeuland. 1981. A micromodeling approach to investigate the advertising-sales relationship. Management Sci.27 September 988--1005. apply nonlinear estimation to a market level model based on aggregation of an individual level model of consumer response to advertising. In this paper, a simpler estimation technique is developed and successfully employed for that same model.