The Impact of Heterogeneity in Purchase Timing and Price Responsiveness on Estimates of Sticker Shock Effects

Chang, Kwangpil; Siddarth, S.; Weinberg, Charles B.
June 1999
Marketing Science;1999, Vol. 18 Issue 2, p178
Academic Journal
Abstract The notion that individuals have an internal reference price against which they compare observed prices is well supported by several psychological theories. Empirically, several papers in the marketing literature, employing scanner panel data, have modeled the impact of reference prices on brand coice via the sticker shock formulation, in which consumers evaluate choice alternatives using differences between shelf prices and reference prices. Most of the studies reported thus far have not accounted for heterogeneity in price response among consumers and have typically imputed reference prices from the shelf prices of brands that a consumer is supposed to have "observed" on previous purchases in the category. Since category marketing activity can differentially affect the purchase timing of households, we argue that this measure of reference price may follow certain systematic patterns across consumers and, when combined with unaccounted for price response heterogeneity, may result in a spurious sticker shock effect. Specifically, we show that estimates of sticker shock are biased upward if households that are price-sensitive in the brand choice decision are also more responsive to category promotion activity in their purchase timing decision.We discuss somegeneral conditions under which the bias occurs and conduct a simulation experiment to confirm our specific hypotheses. Our simulation results show that changes in purchase timing are a critical determinant of the bias in the sticker shock effect. We also show that unaccounted for price response heterogeneity can in itself result in a biased sticker shock parameter; however, this requires very large differences in price sensitivities across consumers, far greater than what is normally observed.We develop a hierarchical Bayes version of the nested logit model, which models heterogeneity via individual-level parameters in a continuous random effects framework. We estimate the model on scanner panel data f...


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