Endogeneity in Brand Choice Models

Abstract

Applications of random utility models to scanner data have been widely presented in marketing for the last 20 years. One particular problem with these applications is that they have ignored possible correlations between the independent variables in the deterministic component of utility (price, promotion, etc.) and the stochastic component or error term. In fact, marketing-mix variables, such as price, not only affect brand purchasing probabilities but are themselves endogenously set by marketing managers. This work tests whether these endogeneity problems are important enough to warrant consideration when estimating random utility models with scanner panel data. Our results show that not accounting for endogeneity may result in a substantial bias in the parameter estimates.