Forecasting Marketing-Mix Responsiveness for New Products

Abstract

Before a new product launch, marketers need to infer how demand will respond to various levels of marketing-mix variables to set an appropriate marketing plan. A critical challenge in estimating marketing-mix responsiveness from historical data is that the observed decisions were affected by private information possessed by managers about the heterogeneous effects of marketing-mix variables on sales. The authors refer to this as the “slope endogeneity” problem. Such endogeneity differs from the “intercept endogeneity” problem, which has been widely acknowledged in the literature. To correct for the slope endogeneity bias, the authors develop a conceptually simple control function approach that is amenable to multiple endogenous variables and marketing-mix carryover effects. The method is applied to forecasting advertising responsiveness in the U.S. DVD market. The results suggest that advertising responsiveness varies substantially across DVD titles and that estimated marketing-mix elasticities would be biased if the slope endogeneity problem were ignored. This analysis also yields findings of substantive interest to researchers and managers involved in entertainment marketing.