Inference for product competition and separable demand

This paper presents a methodology for identifying groups of products that exhibit similar patterns in demand and responsiveness to changes in price using store-level sales data. We use the concept of economic separability as the basis for establishing similarity between products and build a weakly s...

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Bibliographic Details
Main Authors: Allenby, G.M (Author), Rossi, P.E (Author), Smith, A.N (Author)
Format: Article
Language:English
Published: INFORMS Inst.for Operations Res.and the Management Sciences 2019
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Online Access:View Fulltext in Publisher
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Summary:This paper presents a methodology for identifying groups of products that exhibit similar patterns in demand and responsiveness to changes in price using store-level sales data. We use the concept of economic separability as the basis for establishing similarity between products and build a weakly separable model of aggregate demand. A common issue with separable demand models is that the partition of products into separable groups must be known a priori, which severely shrinks the set of admissible substitution patterns. We develop a methodology that allows the partition to be an estimated model parameter. In particular, we specify a log-linear demand system in which weak separability induces equality restrictions on a subset of cross-price elasticity parameters. An advantage of our approach is that we are able to find groups of separable products rather than just test whether a given set of groups is separable. Our method is applied to two aggregate, store-level data sets. We find evidence that the separable structure of demand can be inconsistent with category labels, which has implications for optimal category marketing strategies. © 2019 INFORMS.
ISBN:07322399 (ISSN)
DOI:10.1287/mksc.2019.1159