On the Heterogeneity of Demand

Abstract

Demand heterogeneity traditionally has been defined as segments of consumers that are homogeneous with regard to the benefits they seek or in their response to marketing programs (e.g., product offering, price discounts). Although it often is acknowledged that truly homogeneous segments of consumers do not exist, the approximation is assumed to be sufficiently accurate to provide a reasonable basis for the development of marketing strategy. In this article, the authors provide evidence that the homogeneous segment assumption might not be reasonable. By using a normal component mixture model that nests other, more commonly used models of heterogeneity, the authors find that the within-component heterogeneity remains substantial, even when multiple components are present. Predictive tests substantiate their finding of large within-component heterogeneity.