Essays on heterogeneity in choice modeling
Creators: name: Chang, Kwangpil
Publisher: name: University of British Columbia
Year: 2009

description: This thesis includes three essays which examine the implications of incorporating parameter heterogeneity, consideration set heterogeneity, and decision rule heterogeneity, respectively, in brand choice models. In the first essay, we identify the conditions under which unaccounted for price response heterogeneity results in a spurious sticker shock effect. We show, using an analytical derivation, a simulation study and an empirical application to scanner panel data, that estimates of the sticker shock effect may be biased if households that are price sensitive in their brand choice decision are also more likely to respond to category marketing activity in their purchase timing decision. The empirical results, from two product categories, show that the sticker shock coefficient from a Hierarchical Bayes model (which continuously accounts for price response heterogeneity) is statistically insignificant, providing no evidence of the existence of a sticker shock effect. In contrast, the corresponding coefficient from the standard model, which ignores this heterogeneity, is highly significant and supports the existence of a sticker shock effect. A posterior analysis of household parameters confirms the hypothesized relationship between price sensitivity in brand choice and responsiveness to promotional activity in purchase incidence, and is consistent with our explanation of the underlying cause of the bias in the standard model. The second essay develops a new consideration set model that can be estimated with scanner panel data. In contrast to many previous approaches, which require enumeration of all possible consideration sets, we directly model uncertainty about including a brand in the consideration set. The resulting inclusion probabilities for brands reflect a "fuzzy" consideration set in the sense that a brand belongs to the consideration set only probabilistically. The proposed fuzzy set model outperforms several previous consideration set models in two product categories (yogurt and ketchup). We then apply the fuzzy set approach to examine the role of the consideration set in moderating the impact of advertising on price sensitivity. In contrast to the experimental findings of Mitra and Lynch (1995), we find no positive relationship between consideration set size and price sensitivity. Further empirical test may be necessary to confirm the hypothesized relationship. In the third essay, we investigate the role of decision rule heterogeneity in brand choice behavior. We develop a flexible model, which allows for the uncertainty in decision rules used by the consumer. Specifically, we develop a Hierarchical Bayes model of reference price effects that accommodates both the sticker shock and reference-dependent formulations. In addition, we also incorporate the possibility that consumers may mix the two decision rules probabilistically. Therefore, the proposed model allows for three different decision hierarchies which incorporate sticker shock, reference-dependent and mixed rules respectively. The empirical results show that consumers differ not only in their preference and response but also in their decision rules. On average, half the sample households appear to show loss aversion, i.e., follow a reference-dependent decision rule, while the remaining households do not seem to respond to reference prices. The proposed model provides a richer description of consumer choice processes than the comparison models that allow for only one model structure and ignore model uncertainty.