A Probabilistic Choice Model for Market Segmentation and Elasticity Structure

TLDR

Marketing scholars characterize market structure by studying brand‑switching patterns, but this approach often neglects how marketing variables such as price influence switching behavior. The authors aim to develop a flexible choice model that segments consumers by brand preference and price sensitivity. They apply this model to analyze competition between national brands and private labels in a single product category, integrating brand‑switching data with own‑ and cross‑price elasticity estimates. The model yields a unified description of market structure that links brand‑switching patterns to the magnitudes of own‑ and cross‑price elasticities.

Abstract

Marketing scholars commonly characterize market structure by studying the patterns of substitution implied by brand switching. Though the approach is useful, it typically ignores the destabilizing role of marketing variables (e.g., price) in switching behavior. The authors propose a flexible choice model that partitions the market into consumer segments differing in both brand preference and price sensitivity. The result is a unified description of market structure that links the pattern of brand switching to the magnitudes of own- and cross-price elasticities. The approach is applied in a study of competition between national brands and private labels in one product category.