A Hierarchical Bayes Model of Primary and Secondary Demands

Arora, Neeraj; Allenby, Greg M.; Ginter, Jams L.
March 1998
Marketing Science;1998, Vol. 17 Issue 1, p29
Academic Journal
Abstract Product design, pricing policies, and promotional activities influence the primary and secondary demand for goods and services. Brand managers need to develop an understanding of the relationships between marketing mix decisions and consumer decisions of whether to purchase in the product category, which brand to buy, and how much to consume. Knowledge about factors most effective in influencing primary and secondary demand of a product allows firms to grow by enhancing their market share as well their market size.The purpose of this paper is to develop an individual level model that allows an investigation of both the primary and secondary aspects of consumer demand. Unlike models of only primary demand or only secondary demand, this more comprehensive model offers the opportunity to identify changes in product features that will result in the greatest increase in demand. It also offers the opportunity to differentially target consumer segments depending upon whether consumers are most likely to enter the market, increase their consumption level, or switch brands.In the proposed hierarchical Bayes model, an integrative framework that jointly models the discrete choice and continuous quantity components of consumer decision is employed instead of treating the two as independent. The model includes parameters that capture individual specific reservation value, attribute preference, and expenditure sensitivity. The model development is based upon the microeconomic theory of utility maximization. Heterogeneity in model parameters across the sample is captured by using a random effects specification guided by the underlying microeconomic model. This requires that some of the effects are strictly positive. This is accommodated through the use of a gamma distribution of heterogeneity for some of the parameters. A normal distribution of heterogeneity is used for the remaining parameters. Gibbs sampling is used to estimate the model.The key methodological contr...


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