Taste Heterogeneity, IIA, and the Similarity Critique

The purpose of this paper is to show that allowing for taste heterogeneity does not address the similarity critique of discrete-choice models. Although IIA may technically be broken in aggregate, the mixed logit model allows neither a given individual nor the population as a whole to behave with perfect substitution when facing perfect substitutes. Thus, the mixed logit model implies that individuals behave inconsistently across choice sets. Estimating the mixed logit on data in which individuals do behave consistently can result in biased parameter estimates, with the individuals' tastes for desirable attributes being systemically undervalued.Heterogeneity, Mixed Logit, Independence from Irrelevant Alternatives, IIA, Similarity Critique, Ecological Fallacy

The Flexible Substitution Logit: Uncovering Category Expansion and Share Impacts of Marketing Instruments

Different instruments are relevant for different marketing objectives (category demand expansion or market share stealing). To help brand managers make informed marketing mix decisions, it is essential that marketing mix models appropriately measure the different effects of marketing instruments. Discrete choice models that have been applied to this problem might not be adequate because they possess the Invariant Proportion of Substitution (IPS) property, which imposes counter-intuitive restrictions on individual choice behavior. Indeed our empirical application to prescription writing choices of physicians in the hyperlipidemia category shows this to be the case. We find that three commonly used models that all suffer from the IPS restriction - the homogeneous logit model, the nested logit model, and the random coefficient logit model - lead to counter-intuitive estimates of the sources of demand gains due to increased marketing investments in Direct-to-Consumer Advertising (DTCA), detailing, and Meetings and Events (M&E). We then propose an alternative choice model specification that relaxes the IPS property - the so-called "flexible substitution" logit (FSL) model. The (random coefficient) FSL model predicts that sales gains from DTCA and M&E come primarily from the non-drug treatment (87.4% and 70.2% respectively), whereas gains from detailing come at the expense of competing drugs (84%). By contrast, the random coefficient logit model predicts that gains from DTCA, M&E and detailing all would come largely from competing drugs.

Adding Bricks to Clicks: The Contingencies Driving Cannibalization and Complementarity in Multichannel Retailing

This paper empirically explores the contingencies that drive cannibalizing and complementary effects across channels to provide sales forecasting, promotion planning, and customer relationship management guidance to multichannel managers. We investigate three contingencies in a sales analysis of a leading U.S. retailer who adds a new retail store channel to existing catalog and online channels. We show that the emergence and strength of cannibalizing and complementary effects varies over time, across type of channel, and by type of customer, and provide insight into when and where managers can expect these effects to dominate and how to counter cannibalization and promote complementarity across channels. We find that opening retail stores cannibalizes sales in the catalog and online channels in the short term, but produces complementary effects in both channels in the long term; cannibalization is magnified in the catalog channel, while complementarity is magnified in the online channel. Customer analysis suggests that opening retail stores paves the way for higher rates of customer acquisition and higher rates of repeat purchasing among existing customers in the direct channels in the long term.Multichannel Retailing, Channels of Distribution, Direct Marketing, E-commerce, Channel Management

Crafting integrated multichannel retailing strategies,

ABSTRACT Multichannel retailing is the set of activities involved in selling merchandise or services to consumers through more than one channel. Multichannel retailers dominate today's retail landscape. While there are many benefits of operating multiple channels, these retailers also face many challenges. In this article, we discuss the key issues concerning multichannel retailing, including the motivations and constraints of going multichannel, the challenges of crafting multichannel retailing strategies and opportunities for creating synergies across channels, key retail mix decisions facing multichannel retailers, and the dynamics of multichannel retailing. We synthesize current knowledge drawn from the academic literature and industry practice, and discuss potential directions for future research.

Allocating Marketing Resources Allocating Marketing Resources

Abstract Marketing is essential for the organic growth of a company. Not surprisingly, firms spend billions of dollars on marketing. Given these large investments, marketing managers have the responsibility to optimally allocate these resources and demonstrate that these investments generate appropriate returns for the firm. In this chapter we highlight a two-stage process for marketing resource allocation. In stage one, a model of demand is estimated. This model empirically assesses the impact of marketing actions on consumer demand of a company"s product. In stage two, estimates from the demand model are used as input in an optimization model that attempts to maximize profits. This stage takes into account costs as well as firm"s objectives and constraints (e.g., minimum market share requirement). Over the last several decades, marketing researchers and practitioners have adopted various methods and approaches that explicitly or implicitly follow these two stages. We have categorized these approaches into a 3x3 matrix, which suggests three different approaches for stage-one demand estimation (decision calculus, experiments and econometric methods), and three different methods for stage-two economic impact analysis (descriptive, what-if and formal optimization approach). We discuss pros and cons of these approaches and illustrate them through applications and case studies.

The Invariant Proportion of Substitution Property (IPS) of Discrete-Choice Models

This article introduces a newly discovered property of discrete-choice models, which I call the invariant proportion of substitution (IPS). Like the independence from irrelevant alternatives (IIA) property, IPS implies individual behavior that is counterintuitive in the context of choice among similar alternatives. But models that alleviate the concerns raised by IIA, such as generalized extreme value and covariance probit models, do not necessarily alleviate the concerns raised by IPS. I explore the implications of the IPS property on individual behavior in several choice contexts and discuss some models that alleviate the concerns raised by IPS.econometric models, choice models, logit, probit, generalized extreme value, independence from irrelevant alternatives (IIA), individual choice behavior

An Investigation of Earnings Management Through Marketing Actions

Prior research hypothesizes managers use "real actions," including the reduction of discretionary expenditures, to manage earnings to meet or beat key benchmarks. This paper examines this hypothesis by testing how different types of marketing expenditures are used to boost earnings for a durable commodity consumer product that can be easily stockpiled by end consumers. Combining supermarket scanner data with firm-level financial data, we find evidence that differs from prior literature. Instead of reducing expenditures to boost earnings, soup manufacturers roughly double the frequency and change the mix of marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal quarter-end when they have greater incentive to boost earnings. Our results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings and their stated preference to use real actions to boost earnings to meet different types of earnings benchmarks. We estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income. Finally, a unique aspect of the research setting allows tests of who is responsible for the earnings management. Although firms appear unable to increase the frequency of aisle display promotions in the short run, they can reallocate these promotions within their portfolio of brands. Results show firms shifting display promotions away from smaller revenue brands toward larger ones following periods of poor financial performance. This indicates the behavior is determined by parties above brand managers in the firm. These findings are consistent with firms engaging in real earnings management and suggest that effects on subsequent reporting periods and competitor behavior are greater than previously documented. This paper was accepted by Stefan Reichelstein, accounting.accounting, marketing, pricing, promotion, real earnings management