Demand Estimation with Social Interactions and the Implications for Targeted Marketing

Hartmann, Wesley R.
July 2010
Marketing Science;Jul/Aug2010, Vol. 29 Issue 4, p585
Academic Journal
This paper develops a model for the estimation and analysis of demand in the context of social interactions. Decisions made by a group of customers are modeled to be an equilibrium outcome of an empirical discrete game, such that all group members must be satisfied with chosen outcomes. The game-theoretic approach assists estimation by allowing us to account for the endogeneity of group members' decisions while also serving as a managerial tool that can simulate equilibrium outcomes for the group when the firm alters the marketing mix to the group. The model builds upon the existing literature on empirical models of discrete games by introducing a random coefficients heterogeneity distribution. Monte Carlo simulations reveal that including the heterogeneity resolves the endogenous group formation bias commonly noted in the social interactions literature. By estimating the heterogeneous equilibrium model using Bayesian hierarchical Markov chain Monte Carlo, we can also recover some parameters at the individual level to evaluate group-specific characteristics and targeted marketing strategies. To validate the model and illustrate its implications, we apply it to a data set of groups of golfers. We find significant social interaction effects, such that 65% of the median customer value is attributable to the customer and the other 35% is attributable to the customer's affect on members of his group. We also consider targeted marketing strategies and show that group-level targeting increases profit by 1%, whereas targeting within groups can increase profitability by 20%. We recognize that customer backlashes to targeting could be greater when group members receive different offers, so we suggest some alternatives that could retain some of the profitability of within group targeting while avoiding customer backlashes.


Related Articles


    Examines the effects of the cooperative group decision making context on the test-retest reliability of consumer preference ratings. Proposal of situational factors; Proportion of systematic variance; Reason for low correlations among constructs.

  • Análisis del método ordinal de decisión multicriterio del Veto. Fernández Bou, Ángel Santiago; de Mello, João Carlos Soares // INGENIARE - Revista Chilena de Ingeniería;2015, Vol. 23 Issue 4, p556 

    There is no perfect ordinal decision-making method. This means, one ordinal method cannot meet the five Arrow Axioms (independence of irrelevant alternatives, transitivity, universality, Pareto unanimity and total order). For this reason, researchers have been focusing their efforts on finding...

  • Equivalence of strong and coalition-proof Nash equilibria in games without spillovers. Konishi, Hideo; Le Breton, Michel; Weber, Shlomo // Economic Theory;1997, Vol. 9 Issue 1, p97 

    This paper examines the conditions which guarantee that the set of coalition-proof Nash equilibria coincides with the set of strong Nash equilibria in the normal form games without spillovers. We find that population monotonicity properties of the payoff functions, when the payoff of a player...

  • Do Strategic Conclusions Depend on How Price Is Defined in Models of Distribution Channels? TYAGI, RAJEEV K. // Journal of Marketing Research (JMR);May2005, Vol. 42 Issue 2, p228 

    Models of distribution channels have defined retailer and manufacturer pricing decision variables in different ways, such as absolute retail price or absolute retail margin and absolute manufacturer price or absolute manufacturer margin. This article examines whether this choice of definition...

  • New Methods and Models of Group Decision and Negotiation Presented in Recife. Almeida, Adiel; Morais, Danielle // Group Decision & Negotiation;May2014, Vol. 23 Issue 3, p349 

    No abstract available.

  • A Common Nomenclature for Stated Preference Elicitation Approaches. Carson, Richard; Louviere, Jordan // Environmental & Resource Economics;Aug2011, Vol. 49 Issue 4, p539 

    It is often difficult to determine what actually was done in work involving data collected with stated preference surveys because the terms used to describe various procedures have ambiguous and sometimes conflicting meanings. Further, terms used to describe data collection procedures often are...

  • Risk, uncertainty and discrete choice models. Palma, Andre; Ben-Akiva, Moshe; Brownstone, David; Holt, Charles; Magnac, Thierry; McFadden, Daniel; Moffatt, Peter; Picard, Nathalie; Train, Kenneth; Wakker, Peter; Walker, Joan // Marketing Letters;Jul2008, Vol. 19 Issue 3/4, p269 

    This paper examines the cross-fertilizations of random utility models with the study of decision making under risk and uncertainty. We start with a description of the expected utility (EU) theory and then consider deviations from the standard EU frameworks, involving the Allais paradox and the...

  • Discrete choice models of firms’ strategic decisions. Draganska, Michaela; Misra, Sanjog; Aguirregabiria, Victor; Bajari, Pat; Einav, Liran; Ellickson, Paul; Horsky, Dan; Narayanan, Sridhar; Orhun, Yesim; Reiss, Peter; Seim, Katja; Singh, Vishal; Thomadsen, Raphael; Zhu, Ting // Marketing Letters;Jul2008, Vol. 19 Issue 3/4, p399 

    This paper outlines the methods and applications related to the nascent area of empirical discrete games in marketing. Many key strategic decisions firms make involve discrete choices such as deciding the location of a new store, determining where in product space to position a product, or what...

  • Behavioral frontiers in choice modeling. Adamowicz, Wiktor; Bunch, David; Cameron, Trudy; Dellaert, Benedict; Hanneman, Michael; Keane, Michael; Louviere, Jordan; Meyer, Robert; Steenburgh, Thomas; Swait, Joffre // Marketing Letters;Jul2008, Vol. 19 Issue 3/4, p215 

    We review the discussion at a workshop whose goal was to achieve a better integration among behavioral, economic, and statistical approaches to choice modeling. The workshop explored how current approaches to the specification, estimation, and application of choice models might be improved to...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics