Econometric Models for Probabilistic Choice Among Products

Abstract

I understand the discipline of marketing exists to answer questions such as: Will housepersons buy more Brand A soap if its perfume content is increased? Traditional econometric demand analysis provides no answer. Its attention has been concentrated on consumption levels of broad commodity classes (e.g., housing services), examined using aggregate market data, with demand models constructed on the twin pillars of economic rationality and consumer sovereignty. The market researcher has understandably looked elsewhere-to psychology and survey research-for answers to his questions. Realities have forced econometric demand analysts to broaden their perspective. Public intervention in the supply of some commodities, notably in the areas of transportation, energy, and communications, have required economists to recognize the marketing considerations implicit in issues of policy. (The decision of whether to build and how to design a public This paper reviews several recent developments in econometric demand analysis which may be of interest in market research. Econometric models of probabilistic choice, suitable for forecasting choice among existing or new brands, or switching between brands, are surveyed. These models incorporate attribute descriptions of commodities, making them statistical counterparts of the Court-GrilichesLancaster theory of consumer behavior. Particular attention is given to models which yield tree structures of similarities between alternatives. Also reviewed are methods for estimating econometric models of probabilistic choice from point-ofsale sample surveys. * Prepared for presentation at the Conference on Interfaces between Marketing and Economics, Graduate School of Management, University of Rochester, April 7, 1978. Research was supported in part by the National Science Foundation through grant SOC75-22657 to the University of California, Berkeley. Portions of this paper were written while the author was an Irving Fisher Visiting Professor of Economics at the Cowles Foundation for Research in Economics, Yale University.