Determining the effects of observed and unobserved heterogeneity on consumer brand choice

This paper investigates the effects of heterogeneity in consumer choice behaviour. Omitted consumer heterogeneity may lead to badly biased results, and wrong inferences concerning marketing strategies to follow. In this research we study the extent and the cause of this bias. We distinguish between observed and unobserved heterogeneity, by partialing out the effects of unmeasured heterogeneity and modelling it explicitly. The following questions will be addressed: What is unobserved heterogeneity and how much of it can be explained? How should heterogeneity be incorporated in consumer choice models? A hazard model is used for the analysis. The hazard model will yield patterns of switching among brands, as well as the effect of marketing mix variables on brand choice and purchase timing. Differences between switchers and repeat purchasers are studied, and the extent to which brand choice can be explained. Our model is estimated using scanner panel data. We find that it is important to include both observed and unobserved heterogeneity in order to obtain a better fit of the model. Our results show that it may be sufficient to only include observed heterogeneity to obtain unbiased parameter estimates. Including observed heterogeneity also reduces the aggregation or heterogeneity bias in the hazard function.