Demand systems and frequency of purchase models

Abstract

Understanding the frequencies of purchase and the average purchased quantities is important for marketing strategies such as the loss-leader pricing strategy. We develop a microeconomic model where the total purchases of goods are determined by demand systems for the frequencies of purchases and the average quantities purchased, conditional on positive purchase frequencies. An econometric model is developed to estimate the two systems by a Bayesian estimation method, which allows for an unrestricted covariance structure within each system. An empirical example demonstrates how the estimated model can be used to formulate a profitable loss-leader pricing strategy for fish in France.

Habits in frequency of purchase models: the case of fish in France

“…Second, we extend the model presented in Buason, Kristofersson, & Rickertsen (2020) by introducing habit formation. As in their model, our model allows for the joint estimation of 1 Even though count data models have not been used frequently in demand analysis of consumer goods they have frequently been used in health economics, environmental economics, and marketing.…”

“…An understanding of how habits and duration influence these two decisions can be used to formulate marketing strategies such as a loss-leader pricing strategy. This strategy involves reducing the price of some products below their marginal cost and simultaneously increase the price of other products (e.g., Chen & Rey, 2012;In & Wright, 2014;Buason, Kristofersson, & Rickertsen, 2020). In many situations, consumers buy multiple categories of grocery and find it convenient to buy them from a single store.…”

“…A few studies have estimated count data demand systems with unrestricted covariance structure. Examples include Buason, Kristofersson, & Rickertsen (2020); Chib & Winkelmann (2001); and Egan & Herriges (2006). These studies either use Bayesian methods or standard maximum likelihood.…”