ELSEVIER Intern. J.

of Research in Marketing 12 (1995) 67-80 Illrl ¸

The effects of in-store displays and feature advertising

on consideration sets
G r e g M . A l l e n b y *, J a m e s L G i n t e r
Max M. Fisher College of Business, The Ohio State University, 1775 College Road, Columbus, OH 43210, USA

Abstract

A heteroscedastic random utility model which allows for a flem~alepattern of cross elasticities at tire homehokl
level is explored. This flexibility enables the model to describe patterns of price sensitivity among competing ~rands
. . . . . . . . . . . . . F. . . . . . . . . . ,.,,,u~.tmve structure reflected in consideration sets. The effects of displays and features on
these price sensitivities and the consideration sets are examined. The model is applied to scanner panel data of t~a~
purchases, where in-store displays and feature advertisements are found to increase product net utility and decrease
price sensitivity for the promoted item.

Keywords: Heteroscedastic logit; Bayes Theorem

1. Introduction priced with larger margins and enjoy greater than

There are two general approaches that can
lead to financial success for brands in a competi-
tive market. The first is for the brand to position
itself at the core of the market where customer
demand is greatest. However, this placement is
also where competition is greatest and leads to a
situation where products must be priced competi-
tively and abnormal profits are unlikely. A second
potential strategy is for the brand to achieve a
position of product differentiation, in which there
are no close substitutes. To the extent that this
differentiated position appeals to a sufficient por-
tion of the market, it enables the brand to be
* Corresponding author. Tel.: + 1-614-292-9452; fax: + 1-
614-292-0879; e-mail: g m a + @osu.edu;
normal profits. This product differentiation stxat-
egy is often directed at a target market niche.
The end result is less competition, larger margins,
and abnormally hig~ profit as long as suffg'ient
economies of scale can be realized.
Successful product differentiation strategies by
~.ompetL,g firms i~.ad to variety in the product
Gfferings. Buyers choosing from among these op-
tions will consider them to different degrees.
Empirically, households have been observed to
choose from subsets of the available brands
(Gensch, 1987; Silk and Urban, 1978). This f'md-
ing is consistent with eco,lomic modeLs of search
(Hauser and Wernerfelt, 1990, Roberts and L a b
tin, 1991) and FsTchological models of memory
(Nedungadi, 1990). The growing literature on
consideration sets (see Shocker et al., 1991) sug-
gests that these subsets w~y across honseho[ds

0167-8116/95/$09.50 © 1995 Elsev/er Science B.V. A~l fights reserved

SSD! 0 1 6 7 - 8 1 1 6 ( 9 5 ) 0 0 0 0 6 - 2
68 G.M. A ~ , J.l~ Ginter / lntenL J. of Research in Marketing 12 (1995) 67-80
and change depending on usage situations and
marketing a c t ~ e s . Therefore a critical issue is
the extent to which household consideration sets
can be influenced by marketing variables to assist
in the ~np]ementatinn of a product differentia-
~rdtegy.
This paper e~arnines the influence of merchan-
di~ng variables on household consideration sets
using a s~nner-panel dataset of tuna purchases.
Our model is estimated at the household level,
and allows for the consideration set to be influ-
enced by tbe in-store display ~-~d feature advertis-
a c ~ i f i e s of the bratlds. We find strong evi-
dence that consideration sets are more than just
sets of preferred brands, even in this simple prod-
uct choice situation, l-"ne analysis indicates that
Imuseholds more actively consider the price of
brands in the consideration set, and tend to ig-
nore the prices of brands outside the set.
Furthermore, we present evidence that display
and feature variables are important in considera-
tion set formation and product differentiation.
Failing to account for their effect results in
severely biased estimates of household price sen-
sit~ty, l--nese resuits highlight the importance of
using models which are able to accurately reflect
household choices.
The remainder of the paper is organized as
foUows. Section 2 presents the models used in the
analysis and contrasts them to the current litera-
tare on consideration sets. Section 3 discusses the
estimation procedure used to produce the house-
hold-level estimates~ Section 4 then diseusses the
data, and the results are presented in Section 5.
Concluding remarks are offered in Section 6.
2. The model
In ~ i s section we present a parsimonious ran-
dora utility model which pern~ts a flexible pat-
tern of substitutL~-n (nc~-~!A) between choice al-
ternat~'es. Our approach is different from past
attempts to empirically model consideration sets
in two respects. First, we do not attempt to spec-
k~y a structural model of choice in which a house-
hold first identifies a subset of choice alternatives
and then makes a final selection from the subset
(see Swait and Ben-Akiva, 1987a; b; Hauser and
Wernerfelt, 1990; Roberts and Lattin, 1991). The
purpose of these models is to explain why and
how consideration sets are formed.
We study household choices with a single-stage
model which allows for a less well-defined set of
considered alternatives. Shocker et al. (1991, p.
193) suggest this may be a more descriptively
accurate approach when decision makers do not
expend sufficient mental effort to arrive at a
well-defined set of considered alternatives. In our
analysis of household purchases of canned tuna,
we examine consideration sets in terms of house-
hold preferences and sensitivities to the market-
ing mix of the choice alternatives. As a result our
analysis descriptively characterizes consideration
sets, but does not offer a theoretical explanation
of how they are formed.
Second, our analysis is conducted at the
household-level and does not impose restrictions
on the variability of model parameters across
households. This is an important aspect of our
analysis since any mis-specification of household
preferences and sensitivities to variables such as
price will tend to confound the analysis of consid-
eration sets. Past theoretical and empirical stud-
ies of consideration sets (and product differentia-
tion) have not allowed for household heterogene-
ity in all model parameters (e.g. Anderson et al.
1992). Because of the relatively short purchase
histories of households in our scanner-panel
dataset, our analysis requires use of a choice
model that can parsimoniously represent flexible
patterns of substitution.
There have been many descriptive models pro-
posed in the literature which are capable of rep-
resenting flexible patterns of substitution (i.e. an
arbitrary elasticity matrix). Examples include the
work of Carpenter et al. (1987) who concentrate
on aggregate market share analysis, and Batsell
and Polking (1985) who examine consumer choice.
The flexibility of these models is due to a rela-
tively large number of attraction coefficients re-
quired for a general specification of the model.
These models are therefore not suitable for
household-level estimation with scanner-panel
data.
 G.M. Allenby, J.L. Ginter / Intern. J. of Research in Marketing 12 (1995) 67-80
Flexible patterns of substitution can also be
achieved with a random utility model that does
not assume lid errors. Random utility models
with correlated errors were originally proposed
by Hansman and Wise (1978) for the probit model
and by McFadden (1984) for the logit model.
Researchers in marketing have adopted these
models as a means of avoiding the IIA property
(see for instance Allenby, 1989; Currim, 1982;
Kamakura and Srivastava, 1984; Moore and
Lehmann, 1989). However, correlated errors in
the probit model substantially increase the num-
ber of parameters in the covariance matrix, and
many of them are not well identified. McFadden's
nested logit model is more parsimonious, but it
requires a-priori specification of homogeneous
sets of brands for which the IIA property applies.
In other words, a relevant subset must be defined
before the model is estimated, and this makes the
model difficult to implement when different
households perceive different competitive sub-
sets.
In this paper we focus attention on a random
utility model with independent heteroscedastic
error terms. This model is sufficiently parsimo-
nious to allow estimation on the household level
while not imposing an a-priori relationship be-
tween choice probabilities and elasticities. An
important property of the heteroscedastic model
is that choice probabilities meet the homogeneity
restriction associated with economic demand
functions and therefore insure against a monetary
illusion (see Deaton and Muelbanrer, 1980, pp.
15-16). The homogeneity restriction can be ex-
pressed in terms of elasticities such that - ~ i i =
-~i, j ~hj + ~/i: where ~/ii is the own price elasticity
of brand i, ~ij is the elasticity of brand i with
respect to a change in the price of brand j and
~/i~ is the income elasticity. It should be recalled
that the effect of a price change can always be
decomposed into a substitution and an income
effect. However, in a choice model with constant
marginal utility, such as those investigated in this
paper, the income elasticity for the choice proba-
bility is equal to zero (see Allenby and Rossi,
1991 for a detailed discussion).
The homogeneity restriction results in a parsi-
monious definition of product differentiation. The
69
extent to which a brand has differentiated itself is
reflected in the magnitude of its cross e t a s ~ i e s ,
~/ij, for j ranging over the brands. Since the own
elasticity ~/ii is equal in m a g n i ~ to the ~ m of
the cross elasticities, "Yi, j ~h~,,prod~-~ dfffere~i-
ation can be parsimoniously viewed in ~ of
the brand's own elasticity.
Consider the standard assumptions underbfiwg
random utility models (McFadden, 1974) where a
consumer (household) is selecting a brand from a
product line. Brands are as~umed to be ck~e
substitutes to each other, and this results in the
selection of only one brand. Brand i is chosen if
Ui/p i > UJpj for all j
or
In Ui - In Pi > In U~- In pj for all j,
where U/is the (constant) utility per unit of brand
i with price Pi- Utility per unit is assumed to be
only partially observed and is .-node|ed as
a random component or error term:
l n U i - l n P i + e i > l n ~ - l n p i + e j for all j
(1)
Assuming iid extreme value errors (0, o-) re-
suits in the standard logit model with one price
coefficient which is equal in magnitude to i / ¢
(see also Swait and Louviere, I993):.
P r ( i ) = exp[ V ~ / o , ] / ~ exp[ Vj/~r ]
where Vi = In Ui - in Pi and Pr(i) is the p r ~
ity of choosing the ith brand. A limiting aspe~ of
this model is its proportional draw (ILA) prope~y
in which price changes by one alternative affect
the other alternatives in proportion to their
probabilities. The logit model is intended to de-
scribe choice between close s-bstitutes. It is rare,
however, that a price change in the jth altema-
five would have a proportionately equal effe~ oa
all other brands. As discussed earlier, this r e s ~
is counter to the existence of consideration sets ff
it is assumed to hold across all available brands.
A parsimonious and flexib]e method of a[k~-
ing for the differential effects can be achieved by
allowing the random components in Eq. (1) to
70 G.M. Allenby, J.L. Ginter / Intern. J. of Research in Marketing 12 (1995) 67-80
have different variances (see also Hausman and
Ruud, 1987). The idea behind this relaxation lies
in r e ~ i f i n g that the error term represents in-
fo~-mafion not revealed to the modeler of the
consumer actions. It represents uncertainty asso-
d a t e d with, or noise added to, the deterministic
signal In U~- In p~ whose variability is a function
of price. This variance term is a model parameter
to oe estimated and should not be confused with
an error term which reflects overall model fit.
Brands for which consumers are more respon-
s~'e to price changes would therefore have small
variance (to reflect a stronger price signal), while
other brands would have larger variance. The
variance term sets the relative weights of the
deterministic and random components in model-
big the choice probability. As the variance in-
creases, the ratio of the signal (deterministic com-
ponent) to noise (random component) ratio de-
creases. This results in an attenuation of the
effect of price and smaller elasticity values. For
example, the model can describe brands with
large choice probabilities and small cross elastici-
ties with large values of In ~ and a large vari-
ance. Coaversely, brands with small choice proba-
b ~ i ~ aad large elasticity, are represented by small
•~ u e s of In U~ and ~ . This flexible representa-
tion c,f own (and therefore cross) price elasticities
is especiall~ appropriate for the study of inter-
brand competition, product differentiation and
consideration sets.
The deterministic term V/ (equal to In ~ -
In p~) might be viewed as a simple representation
of "value for the money." Basing a choice proba-
b ~ t y on this term would imply that price changes
have a very direct effect on choice probability
(e.g- high price elasticity). The situation may be
one, however, in which the choice probability is
affected more by other (unspecified) factors than
by price. The effects of these unspecified factors
are reflected in the variance term. If these effects
are substantial relative to price, the variance term
be large and the price elasticity will be small.
In general, the magnitude of the variance term is
inversely related to the price elasticity, as de-
sen'bed above.
As ~ t h the standard logit model, choice prob-
abilities are obtained by evaluating the integral
implied by Eq. (1). The resulting integral, how-
ever, can not be expressed in closed form:
Pr(i) =Pr(V~ +ei> |~ +ej for all j )
v, +
xF([v, - +
X-'-F([V/- V/+ei]/~.)f(eil0.i)de,,
(2)
where V/= in U/- In Pi, F is the standard cdf of
the extreme value distribution and f is the pdf. It
should be noted that any distribution could be
assumed and similar results would be obtained.
We prefer to use the extreme value distribution
for two reasons: it nests the standard logit model,
and it leads to analytic expression for the gradi-
ents and derivatives that are ol a similar structure
(see Appendix A).
The choice probability in Eq. (2) is seen to be
a function of the difference in the deterministic
components of brand i versus the other brands,
compounded by the stochastic terms. Consider
the case where 0.1 > 0"2. The presence of 0" in the
denominator of the factors results ip price changes
in Brand 1 having less effect on the choice proba-
bility than price changes in Brand 2. In addition,
ori governs the range of likely values of e i and
appears in each factor. A large value of 0.i re-
duces the relative effect of any brand's price on
the choice probability, while a small value serves
to increase the effect of prices. The influence of
Brand l's price on the choice probability is a
function of both 0"1 and 0"i. Therefore, the choice
probabilities will exhibit a proportional draw
property where price changes by Brand 1 have a
similar effect on all other brands only when the
0"'s are the same for all brands.
The level at which the brand is being consid-
ered will also affect the relative magnitude of the
model parameters. If the brand is not part of the
consideration set, for example, the probability of
choice is likely to be affected primarily by factors
which are not specified in the model. As a result,
the variance will be large and the price elasticity
small. On the other hand, a brand which is under
active and intense consideration will have the
 G.M. Allenby, LL. Ginter / Intern. J. of Research in Marketing 12 (1995) 67-80
probability of choice determined to a greater
extent by its utility and its price, as compared to
the utility and price associated with the other
brands. In this situation, the variance term will
tend to be smaller and the price elasticity larger,
to reflect the lower importance of unspecified
factors.
The heteroscedastic logit model is capable of
representing a variety of cross elasticity patterns,
including those obtained from a nested logit
model. If a cleanly partitioned set of considered
alternatives exists, then the heteroscedastic logit
model will indicate a matrix of cross elasticity
values consistent with this structure. In contrast,
the nested logit model requires prior identifica-
tion of mutually exclusive market partitions
through specification of the correlation pattern of
e's before estimation can take place. The fact
that prior specification of the elasticity structure
is not required is an important advantage of the
heteroscedastic model. It also permits a smoother,
continuous transition between alternative com-
petitive subsets. This is an important distinction
which we will exploit in the next section.
3. Estimation procedure
Various approaches exist for estimating pa-
rameters in discrete choice models. Since our
goal is to draw inference about the behavior of
specific individual households, we are critically
concerned about the limited number of observa-
t,.'ons available per household in scanner panel
datasets. No more than 10 or so observations are
available per year in many typical product cate-
gories. This rules out the use of estimators with
unknown small sample properties such as McFad-
den's (1989) method of simulated moments which
is justified on asymptotic grounds.
A great deal of work has been done to study
the properties of estimators for the multinomial
probit model with general covariance structure
(e.f. Kamakura, 1989). For the general probit
model, complexities arise in evaluating the (n - 1)
dimensional integral needed to obtain the choice
probabilities. In contrast, the proposed het-
eroscedastic logit model only requires the nu-
7t
merle evaluation of a one-dimensiona| /u~gra|
which can be closely approximated using wen
known numerical techniques. Cho~c¢ probabili6es
and gradients (see Appendix A) were all ¢va|u-
ated using Simpson's rule with 150 intervals rang-
ing from - 5 to + 10 standard deviations of ej. In
our application the standard deviations were
reparameterized as exp[~] to ensure posRhce esti-
mates.
The Bayesian estimation procedure of
and Allenby (1993) was used to obtain househokl
estimates, The distinguishing feature of tb~ esti-
mation method is that it provides unktne esti-
mates of all parameters for each househokL In
contrast, many researchers using scanner t~ne|
data employ estimation procedures that resuR in
parameters which describe only the variability of
model parameters across the populatkm. Exam-
pies include Chintagunta et al. (1991) who pro-
pose a candom effects model for the haterce~s of
a logit model, ~nd Kamakura and Russe|[ (t989)
who propose using a mixture model which ap-
proximates the distribution of heterogeneity with
a finite number of mass points. The limitation of
both of these approaches is that they do not
result in unique estimates for each househokL
More recently, advances in estimating hierar-
chical Bayesian random effect models have been
proposed by Allenby and Lenk (1994) for a
tic regression model, and McCulloch and Ro~s/
(1994) for the general probit model using Monte
Carlo methods of estimation (see Gelfand and
Smith, 1990). These random effect models are
capable of yielding unique estimates for each
household for standard logit and probit models.
However, in the analysis presented below, more
general versions of the standard models are ex-
pk~red which can not be estimated with these
techniques.
The extremely small number of o b s e r v a ~ s
per household available in scanner panel datasets
precludes the use of standara maximum like~i-
hood estimation procedures at the household
level. Estimation problems arise whenever a
household is observed not to have purchased a[!
of the items under study. In our data,set reported
below, none of the 225 households were observed
to have purchased all seven of the items in the
 ,'r2 G.M. AUen~,, ZL. Ginter / Intern. Z o f Research in Marketing 12 (1995) 67-80

dataset. In riffs s e t t ~ , maximum likelihood esti- as modified to correspond to a single observation).

mates attempt to drive the fitted probabilities for
items not purchased to zero by setting certain
parameters to/nfinity.
The solution to the problem of data scarcity is
to introduce additional information. This is pre-
cisely what is done in random effects specifica-
tions= information across all households is used to
infer parameters of the distribution of hetero-
genci~. Alternatively., some researchers intro-
duce additional k~formation by way of restrictions
on the parameters (e.g. assurmng the price coeffi-
cient is constant across households or groups of
l~mseholds). Ross/ and Allenby (1993) propose
that the estimation problem be addressed through
a Bayesian framework and that information be
introduced through a prior distribution on the
parameters. Inferences are then based on the
posterior distribution. The impact is to move the
fitted probabilities away from zero and one by
moving the parameter estimates closer to the
prior mean.
A normally distributed prior is constructed by
first estimating the choice model with loyalty
coefficients across households (see Guadagni and
Little, 1983; Allenby and Rossi, 1991). The maxi-
mum Likelihood estimates, with loyalty adjusted
coefficients, are taken as the prior mean, 0. The
prior covariance matrix, Z, is taken as the vari-
ance-covariance matrix scaled back to corre-
spond to the amount of expected inform, ation
contained in one observation of data (this adjust-
ment is based on the Fisher Information Matrix,
This procedure typically results in a relatively
diffuse prior, with standard deviations greater
than five. It therefore prevents the prior from
overwhelming the household data. Household pa-
rameter estimates are based on the mode or" the
posterior distribution, which reflects a combina-
tion of household information and the standard
maximum likelihood estimates. Note that in the
worst case, in which no data exist for the house-
hold, this proceaure is similar to other (aggre-
gate) estimation approaches. This Bayesian esti-
mation procedure can be viewed as starting with
and then improving upon aggregate parameter
estimates through consideration of the available
household specific data.
Similar to maximum likelihood estimation, the
mode of the posterior is obtained by first taking
the log of the posterior, which is equal to the log
likelihood plus the log prior. For a normally
distributed prior, estimation algorithms are sim-
ple modifications to standard routines, which are
available upon request from the authors:
Objective
Function: log posterior = log likelihood
- 1/2(0 - 0)'E- ~ ( 0 - O)
Gradient: g(log posterior)=g(log likelihood)
- E - t ( 0 - 0)
Hessian: H(log posterior)= H(log likelihood)
_ ~-~- 1
In the analysis presented below we find the pre-
dictive perfo_rmance of the household-level esti-

Table 1
Description of the data
Brand (Abbr) Relative mar- Average Percent of purchases on
ket share ~ price paid Display Feature
In wQter
Chicken o~ the Sea (COSw) 0.47 0.51 0.18 0.55
SlarkLq (STKw) 0.13 0.76 0.04 0.15
3 D~mond (3DIAw) 0.09 0.69 0.04 0.17
House Brand (HSEw) 0.03 0.66 0.02 0.12
Inoil
ChL~en of the S~d (CuSp) 0.17 0.53 0.17 0.52
Starkdst (STKo) 0.07 0.75 0,02 0.22
3 Diamond (3DIAo) 0.04 0.70 0.05 0.12
a Relative market shares add to 1.09. These brands represent 87% of total category volume.
 G.M. Allenby, J.L. Ginter/ Intern. J. of Researchin Marketing,12 (1995) 67-80 73

mates to be better than aggregate estimates that
rely o n loyalty variables to account for hetero-
geneity.
4. Empirical analysis
A scanner panel dataset of t u n a purchases in
Springfield, Missouri is used to contrast the prop-
erties of the proposed model to a n u m b e r of
alternatives. The data were extracted from a large
E R I M (A.C. Nielsen) database and pertain to
one of four chains in the city (chain 3). This chain
was selected to investigate the effect of high
promotional activity by one of the brands
(Chicken of the Sea). The dataset is comprised of
seven 6.5 oz. tunas which account for 87% of the
total category volume. Four items are packaged
in water a n d three are packaged in oil. A descrip-
tion of the data is presented in Table 1. The
explanatory variables include price, the presence
or absence of a n / n - s t o r e display, and a second
d u m m y variable equal to one if an item is fea-
tured in a major advertisement.
T h r e e version of the heteroscedastic logit
model are examined in the analysis presented
below, along with two standard models. T h e stan-
dard models are the one-price coefficient logit
model and a nested logit model that groups the
water based t u n a separately from the t u n a pack-
aged in oil. Both of t h e m alternative m o d e ~
result in probability functions thet ~atL~ the
homogeneity restriction of d e m a n d func~kms. The
a-priori specification of a water versus oil market
structure is based on the observation tha~ p r ~
form has b e e n found to be a reasonable basis for
partitioning the markets of a n a m e r of other
products, e.g. tub versus stick margarine,
brewed versus instant coffee. O t h e r specif~'atk~r~
of the nested logit model have b e e n i m a e s t ~ t ~ [ ,
and they result in poorer in-sample a n d predic-
tive fits to the data.
The heteroscedastic m o d e h differ in the
n e r in which display and feature var/ables
the model. In the first model, dhplay argi fe~Rure
are constrained to influence only the d e t e ~
tic c o m p o n e n t ( V ) in Eq. (2), while in the second
medel they are constrained to hffluence ~ o,.
The third model allows display and feature to
influence both V and ~r:
Heterosce- Parameterizz:tion
dastic Model
t ; = f ( p , d, f )
V = f ( p ) ; ~r~-g(d, f )
V = f ( p , d, f ) ; o = g ( d , f )

Table 2
In-sample and predictivefits
Model Parameters In-s~.ple fit Predictive fit (601 obs)
Log-like Obs. Hit Pr [H/t Log-like
r~te

Aggregatemodels with loyalty

Logit 10 - 808.81 814 0.697 0.551 - 498.60
Nested Logit 12 - 796.36 814 0.702 0.552 - 487.57
Heteroscedastic Logit l 17 - 795.22 814 0.681 0.535 - 514.40
Hcteroscedastic Logit 2 17 -786.22 814 0.712 0.519 -495.85
Heteroscedastic Logit3 19 - 776.82 814 0.712 0.535 - 489.07
Household-leve!mode!s
LogR 9 - 835.68 a 1530 ~).705 0.649 - 526.86
Nested Logit 11 - 831.26 1530 0.710 0.629 - 526.47
Heteroscedastic Logit 1 15 -825.17 1530 0.682 0.588 -519.35
Heteroscedastic Logit 2 15 -644.66 1530 0.705 0.652 -589.90
Heteroscedastic Logit 3 17 -452.68 1530 0.712 0.678 - 8t3.71
a For the household-levelmodels, fit is measured in terms ef the log posterior = log likelihood+ log prior. The ~'k~r va.F~Rce
corresponds to the expected informationcontained in one observationof data.
74 G.M. A / t e n b y J.L. C-liner~Intern. J. of Research in Marketing 12 (1995) 67-80
where f ( p , d, f ) = f l 0 - In price + fldDisplay +
flrFeature and g(d, f ) = exp[T0 ~ yaDisplay +
yfFeature]. These specifications allow the investi-
gation of whether disp|ay and feature variables
serve to change a brand's net utility (model 1), its
price sensitivity (level of perceived differentiation
and consideration) ha model 2, or both (model 3).
All models were estimated at the aggregate-
level, using loyalty variables, and at the house-
~ d - l e v e l using the estimation prn_cedure de-
scribed above. For the aggregate-level models,
the first third of the data was used to construct
|~jalty variables ec,val to the model residual for
each household. The loyalty of the hth household
for the jth brand is def'med as:
l
where Yajt is an indicator variable of purchase,
Ph~ are the fitted choice probabilities and N h is
the number of purchase occasions for the hth
household. As discussed by Allenby and Rossi
(1991), traditional loyalty measures based on ob-
served purchases (see Guadagni and Little, 1983)
do not consider the possibility that a household
may appear to he loyal to a brand because it was
frequently promoted. The above specification ac-
counts for the promotional activity through the
choice probability.
Aggregate-leve~ estimates are based on the
second third of the data, while the final third was
reserved for pr¢:~edve testing. Household-level
estimates are based on the first two-thirds of the
data.
5. Results
5.L Made! fit
The ha-sample and predictive fits of the logit,
nested Iogit and heteroscedastic logit models are
presented ~ Table 2. The in-sample fit is mea-
sured "~n terms of the log posterior ( = log likeli-
h ~ + log prior) while the predictive fit is re-
p o ~ e d in terms of the log likelihood. TP,e fits of
the household-level models are much better than
the aggregate-level models, implying that thert
exists substantial household heterogeneity in
model parameters beyond that captured by loy-
alty variables.
The third heteroscedastic model fits the data
best at both the aggregate and individual level.
However, because the number of parameters dif-
fers across models and estimation procedures, we
also report predictive measures of fit to assess
which model is most consistent with the data. The
goal of traditional statistics based on in-sa:a~ ~= fit
such as Akaike's (1974) AIC or Schwarz:s (1978)
BIC criterion is to approximate the predictive fit
of the model by penalizing the likelihood for the
number of parameters. Since the household-level
models were estimated in this analysis by maxi-
mizing the posterior rather than the likelihood,
more reasonable evidence for the models can be
obtained by examining their actual predictive fits
on a holdout sample.
Three measures of predictive fit are provided
in Table 2: (1) the hit rate, defined as the propor-
tion of times the choice alternative with the high-
est probability is actually selected; (2) the average
hit probability, defined 2~ the average choice
probability of selected alternative (Pr i Hit): and
(3) the log-likelihood which imposes a logarithmic
penalty, function on the probability of the se-
lected alternative.
In general, the average hit probabilities are
substantially better for the household-level mod-
els but the log-likelihood values are worse. This is
due to two factors: (1) the logarithmic function
which assigns an increasingly severe penalty to
choices with predicted probabilities near zero,
and (2) the fact that in our data we find over 15%
of the households purchase outside their "choice
set" in the hold-out sample. If these unexpected
observations are removed from the analysis then
the predictive log-likelihood for the household
level models becomes -248.34 for the logit
model; -261.85 for the nested logff model; and
- / I A ,7 r_
---,~'~..:~, -248.03 and -246.73 for the three
he'.eroscedastic models (n = 522). Therefore the
su0erior log-likelihoods of the more simple
household-level models are due to the fact that
they yield less extreme predicted choice probabil-
ities.
 G.M. Allenby, LL. Ginter / Intern. J, of Research in Mar,t;eting 12 ('995) 67-8~) 75

On balance, the analysis provides most support
for the household-level heteroscedastic logit
model 3. In this model, in-store displzys and
feature advertising influence both V and tr in Eq.
(2). This model has the best in-sample fit, and
results in the best hit rates and hit probabilities
for the household-level analysis. As indica~ecl
above, this model is extremely accurate for the
85% of the sampie whose hold out purchases
were consistent with their historical choice behav-
ior. Its poor performance with the log.likelihood
criterion is due to the fact that it leads to more
extreme pl,~babilities that are heavily penalized
with a logarithmic function.
5.Z Parameter estimates
Table 3 reports parameter estimates for both
the aggregate and household-level heteroscedas-
tic model_ 3. As with the :~t~.~,qard i~vg~ra~.~,t, ~he.
intercept of one choice alternative (H3Eo) it: ~
model is arbitrarily se~ to z~-o t~.~~chieve ge.Pstb
cal identification. Aggregate-[e~-el e~tim~t::~ e ~
standard errors are reported on :he ie.q sine of
the tabl::, while mean, minimum and maximum of
tne household-leeel es~.imat~s are r e ~ r g e d on the
right side of the table. Two loyalty coeff~c~e~
were estimated in the aggregate-le¢el model (one
for V and one for o-), while none were estimated
in the household-level models.
There are two interesting results ~ d
with the aggregate-level estimates. Fh's¢, the rib-
play and feature coefficients exhibit a signifi-
cantly l~siti'-e influence on V, and feature signifi-
cantly influences o-. These merchandising vari-
ables selve to increase the net utility of the brarrd
(V) and reduce the influence of price by decreas-
ing the "signal-to-noise" ratio (i.e. increasing the

Table 3
P a r a m e t e r estimates for hetercscedastic Logit Model 3
Aggregate-level estimate:; Household-level estimates a
(standard e r r o r )
Mean Min. Max.
V/=/30i - In Pi + g'X

~0i:
COSw 0.552 (0.181) 0.462 - 3.505 1.657
STKw 0.563 (0.180) 0.449 - 3.332 1.458
3DIAw 0.347 (0.167) 0.193 -3.418 1.366
HSEw - 0.043 (0.281) - 0.209 - 3.245 3.263
COSo 0.174 (0.191) 0.191 - 4.305 2.tY20
STKo - 0.172 (0.254) - 0.044 - 5.954 2,635
3DIAo 0 0 0 0
Covariates:
Display 0.165 (0.060) 0.00t - 1.109 1.353
Feature 0.124 (0.038) 0.131 - 0.930 0.872
Loyalty 0.092 (0.076) 0 0 0
Sigma~ = ex~y0i + y'X]:

Y0i;
COSw -- 1.580 (0.205) - 2.878 - 5.942 2.669
STKw - 2.639 (0.407) - 3.899 - 8.401 O.159
3DIAw - 1.788 (0.166) - 2.193 - 4.818 0.624
HSEw - 1.362 (0.9,36) - 1.869 - 4.143 - 0.785
COSo - 1.483 (0.187) - 2.505 - 6.201 1.411
STKo - 1.165 (0.186) - 1.936 - 4.274 3.706
3DIAo - 1.351 (0.232) -2.115 -5.399 -0.133
Covariates:
Display 0.134 ( 0 . 1 6 9 ) 0.294 - 4.188 4.043
Feature 0.631 (0.I 14) 0.336 - 2.037 3.12e2
Loyalty 2.508 (0.260) 0 0 0

a R e p o r t e d are the m e a n , m i n i m u m a n d m a x i m u m o f the distribution o f household estimates.

76 G.M. Allenby, Z L. Ginter /Intern. J. o f Research in ,Marketing 12 (1995) 67-80
relative influence of non-price factors). As dis-
cussed above, the reduction of own price elastic-
ity also implies a reduction of ~oss-elasticity for
the competing brands. The position of the pro-
rooted item will therefore be enhanced with re-
spect to the consideration set. This effect is par-
fieularly strong for feature advertisements, sug-
gesting that households may limit *,he amount of
in-store brand evaluation more with features than
with in-store displays.
Second, the results indicate that the loyalty
variables also serve to increase the signal-to-noise
ratio (o-), and do ffot significantly affect a house-
hold's net utility for the brand (V). This result
contrasts sharply with results for the logit model
and other studies (Guadagni and Little, 1983)
where si~ificant loyalty coefficients are inter-
preted as adjusting the model intercepts to reflect
household preferences. Instead, the aggregate-
level estimates in Table 3 indicate that loyal~ is
more closely related to lack of price sensitivity.
The household-level estimates vary widely
across households, as indicated by the summary
statistics report on the fight side of Table 3. The
mean of the distribution of household-level esti-
mates is approximately equal to the aggregate-
level estimates for V but net for ~r. This is consis-
tent with the magnitude of the respective loyalty
coefficients. The implication of these parameters
for pricing and merchandising activity is explored
next.
5.3. Price sensitivity
All of the models estimated in this study pos-
sess the homogeneity property of economic de-
mand functions where the own elasticity r/i: is
Table 4
Own-price derivatives
COSw STKw
Lo~t Model -0.78 -0.23
Nested Lo~t Model -0.62 -0.17
Heteroscodasfic Model 1 - 0.39 - 0.41
Heteroscodastk: Model 2 -0.95 -0.82
Heteroscedastic Model 3 - 1.13 - 0.99
equal in magnitude to the sum of the cross elas-
ticities, Ei,jr/ii. In models of discrete choice,
where the outcome variable is a probability, the
elasticity is equal to the derivative of the choice
probability with respect to log price. Since a
probability is already a percentage, this derivative
is equal to the change L-. the choice probability (a
percentage change) with respect to a percentage
change in price. Since this derivative is equal to
the sum of the cross-derivatives, it also represents
the expected switching that can be expected for a
percentage price change.
Table 4 reports the own price derivatives with
respect to log price averaged across households
and weighted by the frequency of purchase of
each household. These derivatives represent a
market-level expectation of the amount of choice
switching induced by a price cut during a given
time period. To facilitate the study of the differ-
ences of the models, the derivatives were evalu-
ated at the regular, non-promoted price of the
brands, assuming no display or feature activity.
The own-price derivatives substantially differ
across models, with heteroscedastic model 3 hav-
ing the highest values (except for COSo). For
example, the derivative for Starkist (water) is
-0.99, implying that a 10% price cut will induce
9.9% of the choices to switch. In contrast, the
logit model derivative suggests that a 10% price
cut will induce switching by 2.3% of the choices~
and 1.7% for the nested logit model.
As discussed earlier, the logit model assumes
that price has an equal impact across brands.
However, if some households actively consider
the prices of only a subset of brands, then the
estimated price sensitivity estimated across all
choice alternatives will be biased downward for
3DIAw HSEw COSo STKo 3DIAo
-0.14 -0.11 -0.58 -0.13 -0.04
-0.11 -0.11 -0.45 -0.10 -0.05
- 0.28 - 0.08 - 0,23 - 0.22 - 0.29
-0.35 -0.12 -0.35 --0.26 -0.13
- 0.41 - 0.15 - 0.43 - 0.35 - 0.14
 G.M. Allenby, J.L. Ginter/ Intern. 3".of Researchin Marketing 12 (1995) 67-80
those brands in the consideration set. The nested
Iogit model helps avoid this problem by locally
partitioning the alternatives into subgroups, but
this sub-grouping may be incorrect for some
households. The heteroscedastic mode; is more
flexible (e.g. does not require an a-priori parti-
tioning of the brands) and results in the largest
estimates of the price derivatives. These r,:sults
indicate that price sensitivi~ within a household's
consideration set is much greater than the (aver-
age) price sensitivity across all brands. Tradi-
tional choice models rio#t, nested logit; which
fail to account for differing levels of co.~sMera-
tion substantially underes¢:;aate g,r i ~ sensitivirj
in the market.
This finding is cor=s~tent ~ t h the basic notion
of consideration sets. Those brands in the consid-
eration set are viewed as near substitutes, com-
pete intensely, and are vuL,zerab~e to each other
through price sensitivity. If the cross elasticities
of brands in the consideration set are greater
b e c a u ~ of this intense competition, then each of
these brands will exhibit a high own price elastic-
ity. On the other hand, brands outside the consid-
eration set tend to show relatively litg!e response
to price changes, i.e. price changes are not espe-
cially effective in introducing new brands into the
consideration set.
Price, Display and Feature
HSEw
3~Aw
0 O
COSw
srKo~ ¢
-4 -2 0 2
Fig- 1. The influence of in-store displays and feature advertising o~ household consideration sets.
77
5.4. The influence o f display and feature on coff~k~-
eration sets
Our analysis indicates that in-store d/spays
and feature advertisements serve to increase the
net utility (V) of the brand and to reduce the
influence of price (or) in .'he purchase deciskm.
The following analysis was cor=ducted m investi-
gate the extem to which these m e r c h a ~
s::~po~ v~riables affect household conskierado¢
.~etL
For puiposes of our analysis, we o~rationaJqy
m e ~ : r e a h~lsehoid': consideration set by Lhe
pairwise probab~3P.ies that V¢¢obrands are ~ t -
taneot;sly con,~ider~d by the houset~ld. A mea-
sure ~f ti,e proximivj of two brands can be o b
taincd by evab.~,~;iag the f'anction:
d,,i = -tog (P~(i)V,(j)),
which is large when either one of the b r a n d s / s
not considered by the household, and is sm~_U
only when both brands have a high choice p r o ~ -
bility. Averaging tiffs measure acioss househokts
and across purchase occasions results in an aggre-
gate distance matrix which reflects the ~fint ~ -
sideration of ail brands due to household pxefer-
ences and sensitivities to c h a n g / r i g marketing mix
variables. This distance matrix can then be exam-
Price Only
,q.
3OlAw
O#
30¢Ao
SEw SIKw CO~,~
ST~
"r
I
4 -4 -2 0 2
78 G.M. All~,~, J.L. Gimer / Interm J. of Research in Marketing 12 (1995) 67-80
ined using traditional multidimensional scaling
(MDS) meihods.
Fig. 1 presents two-dimensional maps of joint
consideration using Torgerson's (1958) classical
MDS. The left side of the figure is based on
distance generated from the pricing, display and
feature activity of the brands in the holdout (pre-
d i c ~ e ) sample using the third heteroscedastic
h ~ t model. The fight side of the figure is based
only on the pricing acthdty. The two dimensions
aexount for over 70% of the variance of the
distance metric in both plots.
In-store display and feature advertising serve
to move the aggregate competitive structure away
from a water versus oil orientation, to one b a ~ d
more on brand names. The right plot shows wa-
ter-based tuna on the left and oil-based tuna on
the fight. When display and feature variables are
included in the probability calculations, choice
alternatives with the same brand names are plot-
ted close to each other. The distances in these
pk~ts reflect joint consideration, i.e. joint mem-
berslfip in the consideration set. The differences
in the interpoint distances and brand groupings
in the two plots therefore qualitatively illustrate
the importance of display and feature in modify-
ing household consideration sets.
6. Discussion
The analysis .v,e
. . . . . . . "e,~
A above indicates that
consideration sets exist and are important in even
the simplest of choice settings. In o u r study of
household purchases of canned tuna, we find
evidence that standard choice models, which as-
sume a proportional draw response to price
changes, do not accurately reflect household pur-
chase behavior. Our analysis indicates that it is
not sufficient to simply allow for household het-
erogeneity in brand preferences in choice models.
it is also necessary to allow sens/tivities to the
prices of the choice aiternatives to differ across
households and across brands. Failure to do so
results in substantially biased estimates of house-
hold price sensitiviBt.
We allow for price sens~th~ty to gepend on the
in-store display and feature acthdty of the choice
alternatives, and find that these variables serve to
decrease household price sensitivity. This effect is
particularly strong for feature advertisements,
suggesting that many households may identify
their brand selection before actually going to the
store and observing the array of prices.
Finally, the results indicate that in-store dis-
plays and feature advertisements influence inter-
brand competition through household considera-
tion sets. In our analysis of fitted choice probabil-
ities, we find evidence that these merchandising
support variables serve to increase the likelihood
that choice alternatives with the same brand
names are jointly considered. Without these vari-
ables, brands of the same form (oi! versus water)
tend to be considered more often.
The effective management of household con-
sideration sets with in-store displays and feature
advertisements can therefore assist in efforts to
achieve reduced competition and higher profits.
Displays and features offer an immediate, short
term reduction in price competition, similar to
the long-term effects traditionally sought in a
product differentiation strategy. We expect that
these merchandising support variables are partic-
ularly effective in low-involvement product cate-
gories where there is limited information search
and consideration sets are often not precisely
defined.
Appendix A: Gradients for the heteroscedastic
logit model with independent extreme value er-
rors
Choice probability:
Pr(i) = fF([V i - V l + Ei ]//O'1)
x e ( [ v, - v2 +
×-.- F([v,- +
where
V~ = X~fl - In p~
Distribution:
F ( x ) = e x p [ - e -~]
 G.M. Allenby, J.L. Ginter ~Intern. 1. of Pw~arch in Marketing 12 (1995) 67-80 79

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