Product Attributes, Cross Elasticities and Dynamic Market Structure in a Category with Many Products - with Wenxi Li and Pradeep K. Chintagunta

Abstract

We study the changes in market structure, and consumers’ sensitivities to product attributes and marketing activities for a product category that experiences large changes in product variety. To allow for flexible cross-elasticities while confronting parameter explosion when product variety increases, we leverage a dataset with detailed product descriptions that contains information on intrinsic characteristics of the product to construct “distances” between products in attribute space. Cross elasticities are then specified as functions of these distances in a standard log-log demand model. Dynamics in model parameters are accounted for via a dynamic linear model (DLM) specification and the model is estimated using Bayesian methods. We provide an empirical illustration using data from the competitive yogurt product category. Product prices, attributes, prices and promotions are the major drivers of sales that we include in the model. Besides providing a dynamic description of a market, the proposed modeling framework will serve as an useful input to managers for forecasting the consequences of changing the attributes of products, as well as forecasting the sales of new products with a set of attributes spanned by those in the market.