Attribute-Level Heterogeneity

• Published in: Management science Vol. 61; no. 4; pp. 885 - 897
• Main Authors: Ebbes, Peter, Liechty, John C., Grewal, Rajdeep
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.04.2015; Institute for Operations Research and the Management Sciences
• Subjects: Analysis; Attributes; Bayesian analysis; conjoint analysis; Consumer behavior; Heterogeneity; hierarchical Bayes; Market strategy; Market structure; Marketing; Markov analysis; Markov processes; mixture models; Monte Carlo method; Monte Carlo simulation; Random variables; Reversible; reversible-jump MCMC; segmentation; Simulation; Specification; United States
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2014.1898

Modeling consumer heterogeneity helps practitioners understand market structures and devise effective marketing strategies. In this research we study finite mixture specifications for modeling consumer heterogeneity where each regression coefficient has its own finite mixture-that is, an attribute finite mixture model. An important challenge of such an approach to modeling heterogeneity lies in its estimation. A proposed Bayesian estimation approach, based on recent advances in reversible-jump Markov chain Monte Carlo methods, can estimate parameters for the attribute-based finite mixture model, assuming that the number of components for each finite mixture is a discrete random variable. An attribute specification has several advantages over traditional, vector-based, finite mixture specifications; specifically, the attribute mixture model offers a more appropriate aggregation of information than does the vector specification facilitating estimation. In an extensive simulation study and an empirical application, we show that the attribute model can recover complex heterogeneity structures, making it dominant over traditional (vector) finite mixture regression models and a strong contender compared to mixture-of-normals models for modeling heterogeneity. This paper was accepted by Pradeep Chintagunta, marketing.