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A Model for Trade-Up and Change in Considered Brands

Fisher College of Business, Ohio State University, Columbus, Ohio 43210
In4mation Insights, Needham, Massachusetts 02494
Booth School of Business, University of Chicago, Chicago, Illinois 60637
allenby.1{at}osu.edu
mgarratt{at}in4ins.com
peter.rossi{at}chicagogsb.edu

A common theme in marketing literature is the acquisition and retention of customers as they trade up from inexpensive introductory offerings to those of higher quality. We develop a nonhomothetic choice model to accommodate effects of advertising, professional recommendation, and other factors that facilitate the description and management of trade up. Our model allows advertising to affect the relative superiority or inferiority of products. This allows for a wide variety of trade-up patterns beyond those obtained from a standard random utility formulation of the logit model. Our nonhomothetic model allows for advertising to affect more than just brand intercepts (perceived quality), but also the rate at which consumers are willing to trade up to higher quality brands. Advertising effects are measured using a randomized treatment and evaluated by considering their direct implications for firm pricing and profits.

Key Words: nonhomothetic utility; advertising; quality; discrete choice
History: Received: February 12, 2008; accepted: September 15, 2008.