The Evolution of Internal Market Structure

We present a dynamic factor‐analytic choice model to capture evolution of brand positions in latent attribute space. Our dynamic model allows researchers to investigate brand positioning in new categories or mature categories affected by structural change such as entry. We argue that even for mature categories not affected by structural change, the assumption of stable attributes may be untenable. We allow for evolution in attributes by modeling individual‐level time‐specific attributes as arising from dynamic means. The dynamic attribute means are modeled as a Bayesian dynamic linear model (DLM). The DLM is nested within a factor‐analytic choice model. Our approach makes efficient use of the data by leveraging estimates from previous and future periods to estimate current period attributes. We demonstrate the robustness of our model with data that simulate a variety of dynamic scenarios, including stationary behavior. We show that misspecified attribute dynamics induce temporal heteroskedasticty and correlation between the preference weights and the error term. Applying the model to a panel data set on household purchases in the malt beverage category, we find considerable evidence for dynamics in the latent brand attributes. From a managerial perspective, we find advertising expenditures help explain variation in the dynamic attribute means.