Return on investment implications for pharmaceutical promotional expenditures: The role of marketing-mix interactions

The authors empirically explore the revenue impact of marketing-mix variables and their interactions. The findings include the following: pharmaceutical direct-to-consumer advertising and detailing (sales force) affect demand synergistically, detailing raises price elasticity, and detailing has a higher return on investment than does direct-to-consumer advertising. The authors also discuss other implications and provide future research directions

Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone

Since the Apple iPhone’s first launch in 2007 with an exclusive arrangement with AT&T, it has garnered overwhelmingly positive responses from consumers and from the media. With its success, exclusive contracts between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. Such practices have been criticized by regulators, by the media, and by “locked-out” consumers, due to the fact that a consumer has to subscribe to a particular service provider if he or she strongly prefers one handset to others. In this paper, we empirically examine the impact of handset exclusivity arrangements on consumer welfare. First we study consumers’ purchase decisions in mobile services that include the choice of a handset and of a service provider. We do so by combining survey data on consumers’ purchase decisions with supplemented data on prices and features of common handsets. Next, assuming a Stackelberg leader-follower relationship between the handset manufacturers and the service providers, and using our demand estimates, we recover the marginal costs for the players in the market. We then simulate what would have happened in the counterfactual scenario when the iPhone is available from all carriers. Our results suggest that, if we take into account price adjustments from handset manufacturers and service providers in response to the change in market structure, consumer welfare will increase by $326 million without the exclusive arrangement. We view our analysis as a starting point to a more complete characterization of consumer behavior and the complex relationships among players in this industry

Estimating a Multinomial Probit Model of Brand Choice Using the Method of Simulated Moments

The multinomial probit model of brand choice is theoretically appealing for marketing applications as it is free from the “independence of irrelevant alternatives” property of the multinomial logit model. However, difficulties in estimation have restricted its widespread use in marketing. This paper presents an application of the method of simulated moments, a new methodology that enables easy estimation of probit models with a large number of alternatives in the choice set. We describe the theoretical development of the technique and using pseudo-simulated data, conduct numerical experiments to compare the method with existing techniques for estimating probit models. Using the scanner panel data on the purchases of catsup, we provide an empirical application of the method of simulated moments to the estimation of the parameters of a multinomial probit model. Estimating the covariance structure associated with the underlying latent variable probit model enables us to identify broad patterns of similarities across alternatives. It also enables us to derive a pairwise similarity matrix across choice alternatives which when input into a multi-dimensional scaling routine provides us with a graphical representation of competitive structure in the catsup market. For completeness, we compare the substantive implications for the effects of marketing variables obtained from the multinomial probit model with those obtained from models in the extant marketing literature.brand choice, econometric models, estimation

Variety Seeking, Purchase Timing, and the "Lightning Bolt" Brand Choice Model

The "Lightning Bolt" (LB) model provides a comprehensive framework for accommodating the effects of habit persistence, unobserved heterogeneity, and state dependence on household brand choice behavior. This paper presents a discrete, dynamic brand-choice model that belongs to the LB class of models. We propose a method for incorporating the effects of variety seeking into the LB model formulation. The proposed formulation explicitly links brand choice and purchase timing behavior via the effect of state dependence. This state-dependence based linkage between brand choice and purchase timing comes about due to the attribute satiation notion associated with household variety seeking behavior. Empirical implementation of the model specification requires recognizing that interpurchase times, like brand choices, also depend upon marketing variables and household characteristics. A hazard model is specified to capture this relationship. Empirical results are presented using household-level data for two different products. Our results reveal the following. (1) State dependence effects decline over time. Hence, households' brand switching and repeat purchase probabilities vary over time, independent of any variation in marketing mix activities. (2) Accounting for the effects of marketing variables on interpurchase times may be important when empirically estimating the proposed model. While the nature of substantive implications is largely unchanged, the magnitudes of the different effects are nevertheless affected. (3) We find evidence for purchase reinforcement (and its effects declining over time), but no evidence for attribute satiation based variety seeking behavior. (4) A comparison of the model's predictive ability with those from two extant specifications reveals that the proposed model outperforms rival specifications.brand choice dynamics, hazard models, perceptual maps

Investigating the Sensitivity of Equilibrium Profits to Advertising Dynamics and Competitive Effects

The author investigates the validity of the "flat maximum principle"---the insensitivity of a firm's profits to changes in its optimal advertising level---in a duopolistic market in which advertising by the two firms has carryover effects. Two alternative competitive scenarios are examined (i) in which total industry sales are allowed to vary over time, and (ii) where firms are engaged in market share rivalry. For (i), the open-loop Nash equilibrium advertising strategies for the firms are derived assuming a specific sales response function and an infinite time horizon. A numerical analysis of the sensitivity of firms' profit functions to advertising expenditures is performed at different levels of the (a) discount rate, (b) advertising elasticity, and (c) advertising decay rate. An empirical illustration from the pharmaceutical industry is provided. Special cases of the model formulation are examined analytically in order to highlight the intuition behind the flatness of the maximum and to study the sensitivity of results obtained to choice of equilibrium strategy (closed-loop vs. open-loop). For the market share game, closed-loop policies are considered and the flat maximum principle is illustrated in the context of Coke--Pepsi rivalry in the soft drinks market.advertising carryover, competition, flat maximum principle

Inertia and Variety Seeking in a Model of Brand-Purchase Timing

Previous research on state dependence indicates that a brand's purchase probabilities vary over time and depend on the levels of inertia and variety seeking and on the identity of the previously purchased brand. Brand-choice probabilities obtained from models such as the logit and the probit are, however, fixed over time, conditional on the previous brand purchased and on the levels of marketing variables. Consequently, state dependence has largely been studied as a time-invariant phenomenon in brand-choice models, with the levels of inertia and variety seeking assumed to be constant over time. To account for the time-varying nature of state dependence would require a model in which brand-switching probabilities depend upon interpurchase times. One modeling framework that can account for this dependence is based on the hazard function approach. The proposed approach works as follows. All other factors being equal, an inertial household purchasing a brand on a particular occasion is most likely to repurchase that brand on the next occasion. If the household switches, it will be to a brand located perceptually close, in attribute space, to the previously purchased brand. In other words, an inertial household has the highest switching hazard for the same origin and destination brands, with a progressively lower hazard rate for brands perceptually located farther and farther away from the origin brand. The amount by which the hazard is lowered depends upon the perceptual distance and the inertia level of the household. On the other hand, if the household is variety seeking, the most likely brand purchased would be a brand located farthest away from the previously purchased brand in attribute space. In other words, the hazard rate of repurchase is the lowest, with the rate increasing with the distance of the destination brand from the origin brand and the level of that household's variety-seeking tendency. The effects of inertia and variety seeking are, therefore, incorporated at the attribute level into a brand-purchase timing model. In doing so, we attempt to provide greater insight into the nature of state dependence in models of purchase timing. Our model and estimation procedure will enable us to distinguish between households that are inertial and those that are variety prone. In addition to accounting for state dependence, the model also accounts for the effects of unobserved heterogeneity among households in their brand preferences and in their sensitivities to marketing activities. A majority of studies in marketing using the hazard function approach to investigate purchase timing have not accounted for heterogeneity in marketing-mix effects. The study integrates recent methods that incorporate the effects of inertia and variety seeking in brand-choice models with a semi-Markov model of purchase timing and brand switching. The proposed model enables us to (1) infer market structure via a perceptual map for the sample households, and (2) investigate implications for the introduction of a line extension. We provide empirical applications of the proposed method using three different household-level scanner panel data sets. We find that differing levels of inertia and variety seeking characterize the three data sets. The findings are consistent with prior beliefs regarding these categories. In addition, our results indicate that the nature of interbrand purchase timing behavior depends upon the extent of inertia or variety seeking in the data. We are also able to characterize the structure of the three product markets studied. This provides implications for interbrand rivalry in the market. Further, we demonstrate how the model and results can be used to predict the location of a line extension in the perceptual space of households. Finally, we obtain implications for the timing of brand promotions.hazard models, purchase timing, brand choice

Investigating Purchase Incidence, Brand Choice and Purchase Quantity Decisions of Households

We develop a comprehensive utility maximizing framework to study the impact of marketing variables on the category purchase, brand choice and purchase quantity decisions of households for frequently purchased packaged goods. The model allows for dependence among the three decisions while ensuring that these decisions provide, in combination, the greatest possible utility to the household. By accounting for variations in reservation prices and intrinsic brand preferences across households, the modeling framework explicitly captures the effects of unobserved heterogeneity on all three purchase decisions. The principal empirical finding from analyzing the A. C. Nielsen data for the yogurt product category is that the substantive implications for the effects of marketing variables are sensitive to whether these effects are determined conditional or unconditional on a product category purchase. Our results show that reservation prices and intrinsic brand preferences vary across households, and not accounting for these variations in the estimation could lead to biased estimates for the coefficients of the marketing variables. A comparison of our results to those obtained from a nested logit model of purchase incidence and brand choice reveals that our proposed model performs better using both a formal statistical test as well as the criterion of predictive validity in a holdout sample of panelists. Further, the purchase quantity model compares favorably with two alternative models of quantity choice in the validation sample.buyer behavior, econometric models, choice models