Attribute-Level Heterogeneity

Modeling consumer heterogeneity helps practitioners understand market structures and devise effective marketing strategies. In this research the authors study finite mixture specifications for modeling consumer heterogeneity when each regression coefficient has its own finite mixture, that is, an attribute finite mixture model. An important challenge of such an approach to modeling heterogeneity lies in its estimation. A proposed Bayesian estimation approach, based on recent advances in reversible jump Markov Chain Monte Carlo (MCMC) methods, can estimate parameters for the attribute-based finite mixture model, assuming that the number of components for each finite mixture is a discrete random variable. Attribute specification has several advantages over traditional, vector-based, finite mixture specifications; specifically, the attribute mixture model offers lower complexity for modeling heterogeneity and a more appropriate aggregation of information than the vector specification. In an extensive simulation study and an empirical application, the authors show that the attribute model can recover complex heterogeneity structures, making it dominant over traditional (vector) finite mixture regression models and a strong contender compared with mixture-ofnormals models for modeling heterogeneity.