HOUSEHOLD HETEROGENEITY AND STATE DEPENDENCE IN A MODEL OF PURCHASE STRINGS - EMPIRICAL RESULTS AND MANAGERIAL IMPLICATIONS

The problem of separating the effects of household heterogeneity from state dependence in brand choice models is important from a theoretica l as well as a managerial perspective. To address this problem we prop ose a choice model that treats a household's string of purchases as th e unit of analysis, in contrast with conventional models of individual purchases. Our formulation accounts for unobserved household heteroge neity in preferences and in responsiveness to marketing variables, as well as Markovian state dependence. We use three scanner panel data se ts to test models that differ in the nature and extent of heterogeneit y and state dependence accommodated. We find empirical evidence for st ate dependence as well as heterogeneity in each product category. We d emonstrate via simulation of a price promotion bow the separation of t he effects of state dependence from unobserved heterogeneity enables u s to (1) correctly evaluate the profitability of a promotion by explic itly taking into account the multiperiod effects of promotions resulti ng from state dependence, and (2) prioritize market segments for the t argeting of promotional activities. (C) 1997 Elsevier Science B.V.