Modeling and Testing Structured Markets: A Nested Logit Approach

Abstract

A structured market for a product category is a pair (s, As) consisting of a set of consumers s who have the same decision tree, As, which reflects the process by which the consumers in s evaluate product features when making choices. Using a nested logit approach: (1) we present methods to test for the existence of hypothesized multiple structured markets, and (2) we present empirically determined insights on how brands compete within each structured market through the inclusion of marketing mix variables in our model. A successful empirical application of our methods using a panel data set of coffee purchases obtained from Selling Area Marketing Inc. confirms the existence of at least two distinct structured markets in the ground coffee market. The type-primary market is a segment of “switchers”, highly responsive to changes in market mix variables whereas the brand-primary market is a “loyal” segment, relatively unresponsive to marketing programs.

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