An Article Critique on Using Stated Choice Models to Forecast Market

Acceptance of New Product Introductions: A Canadian Quick Service

Restaurant Illustration by Tim Glowa

Presented to
The Faculty of the School of Economics
De La Salle University Manila

In Partial Fulfillment of the Requirements in ECOMET2

Submitted by:
Joshua Tan Co
11213442

Submitted to:
Dr. Cesar Rufino

March 4, 2015

Article Critique
This is an article critique of White paper: Using Sated Choice Models to Forecast
Market Acceptance of New Product Introductions a Candatian Quick Serice Restaurant
Illustration by Tim Glowa on Febrarury 12, 2002. This paper aims to look at the
significance of the article to society, the theoretical backings of the article, the data used,
and the methodology presented. This paper aims to provide insight on the paper as well
as apply econometric lessons and understandings to critique the model of the paper.

Summary of Article
The paper by Tim Glowa is basically a marketing study that makes use of
econometric modeling to come up with proper hypotheses. It uses stated choice discrete
choice modeling to study how the market would react upon introduction of a new product
and if the company (brand) offering the new product has an influence on the decision. It
aims to forecast market acceptance by using a multinomial econometric model.
Particularly it takes a look at the random utility model to observe the satisfaction the
market would get from the new products. In this case, it takes a look at burgers,
particularly how the regular burgers from fast food chains would fair against the
introduction of four new products from various brands. The products are the low fat
burger, the vegetarian burger that taste like real meat, the vegetarian burger that is nonmeat tasting, and the salad bar. The study was conducted on a sample of individuals aged
17-25 across 5 major cities in Canada (Vancouver, Calgary, Edmonton, Toronto, and
London, Ontario). The brands it takes a look at are: Mcdonalds, A&W, Harveys,
Wendys, Burger King, and Dairy Queen.
At first glance, we can say that the objectives of the paper are very clear and
applicable. They want to determine how the market will react given new products in the
already established market for burgers. It looks at utility to measure the probability of a
choice being made. The higher the utility an individual would derive from the decision,
the higher the probability of that said decision, which in this case would be which burger

to choose given the entrants of new choices. It also takes into account the importance of
brand equity, which may explain why actions may differ between companies. I find that
this relates the use of econometrics very well to marketing. The paper mentions that in
the field of marketing, not many research have been done on chioce models, especially
that of consumer behaviour. From marketing we know how important the decisions of
individuals are, and how market research revolves around the decisions of individuals so
studies like this would prove to be very useful to that field. I find it also to be a very
percise application of multiple choice models since there are many variables that go into
the decision of individuals. I also believe that understanding the influence of brands on
decisions is beyond crucial for marketing studies.

Theoretical Framework
Under the multinomial logit model, the paper uses the random utility model to
approximate a variety of choice processes. It is based on the theory of discrete choice
where in aggregate choice behaviors will be affected by an individuals behavior rules as
well as a utility function. It is important to note here that there exists a random element
that is unobserved that may ultimately affect an individuals behavior. The multinomial
logit model it uses is based on the equation
P (i | A) = P [V(i) + e(i) > V(a) + e(a) > ...> V(N) + e(N)] for all j in A
Which states that the probability of choosing alternative i is conditional on A, that is the
probability that the mean value of i plus its random error is larger than all other mean
values and errors of the other j alternatives.
The overriding idea that the author wants to test is the importance of brand equity
in the consumption behaviors of individuals. In marketing and business, it is crucial that
brand name assets are well taken care of. Customer loyalty and good brand image is
important in leveraging the brand into new products. By modeling consumers purchase
decisions, the paper will be able to test if whether greater brand equity can achieve
greater market share through the introduction of new products, burgers in this case.

The author aims to predict the potential demand for a new product among
competitive fast food brands, in turn observing the effects of brand equity. Thus the
author comes up with three hypotheses:
H 1 : The decision to introduce healthier new product offerings will be positively
accepted by the market.
H 2 : Strong brand equity can help leverage a company through product extension.
H 3 : Strong brand equity will leverage a company even without product extension.
The probability model used is very much applicable to the decision in that it
measures the probability of choosing a particular burger given that the chosen burger is
better or more preferred than the other choices. This gives way for brand equity factors to
influence the decision of the individual as well as factors such as price, service and the
product offered. Brand equity is a good measure of the unobserved effect different
companies have on the consumers. A company with better brand equity may have better
sales than a company with the same product but of lower equity. The alternative
hypotheses also allow the author to fully test the effects of brand equity. The author
however did not perfectly state how the H values could capture the effects of brand
equity. Under

H 1 , brand equity does not matter, as the product extension alone is

enough to benefit all fast food companies. The null hypothesis here could be that product
extension would not benefit fast food companies.
there is brand equity in the sample.

H 2 and

H 3 both suggest that

H 2 suggest that brand equity will benefit the

company when the company has product extensions. The intuition here could be that
consumers are already satisfied with the brand so they would be just as satisfied with any
new product. The null hypothesis of this could be that brand equity does not in fact
benefit a company undergoing product extension.

H 3 on the other hand suggests that a

company will benefit from brand equity even if it does not have a product extension. The
intuition is that even if other companies have product extensions, the consumers would
still prefer the company with the higher brand equity. The null hypothesis of this could be
that without brand equity, a company will not gain any benefit from the product extension

of other companies. The author makes the mistake of failing to indicate the probability
values of the null and alternative hypothesis so we assume it to be 0.05

Methodology and Data

The paper did a survey on young adults living in Vancouver, Calgary, Edmonton,
Toronto, and London, Canada for a sample size of 133 individuals. This data was
specifically targeted to the generation Y segment of those aged 17-25. The survey
involved questions of their past fast food experience as well as their preferences and
satisfactions. Individuals were also part of a luncheon game where they were to make
decisions of where they would go for lunch.
Each respondent completed eight randomly generated and one fixed choice tasks.
The fixed choice task was used as a hold out task to test the predictive validity of
multinomial logit models. Among the choices, none was allowed to better mimic the real
world. The data used 2 models:
The main effects model:
Vi =

bBrandi +

sServicei +

pPricei +

tBurger_Typei +

vVegetariani +

lSaladi

And the direct brand effects and indirect marketing mix effects:
Vi =

b Brandi +

Servicei +

p Pricei +

t Burger_Typei +

v Vegetariani + s

l Saladi + ( bp Brandi x Pricei) +( bt Brandi x Burger_Typei) + (

bv Brandi x Vegetariani) +( bs Brandi x Servicei)+ ( bl Brandi x Saladi)

First and foremost, the dataset was very limited. It clearly did not represent the
whole population and did not even represent all the mealtime scenarios. It was only
limited to a specific age group and at a specific mealtime. Data like this could actually be
prone to selectivity bias since it fails to include the rest of the population. Censored and
truncated regressions like the tobit or heckit model could better be used here to account

for the part of the population who is not in that age bracket. This is to avoid the data
being biased and inconsistent. The data also fails to recognize sub branded products like
the Mcdonalds big mac or Burger Kings Whoper, which on their own, have brand
equity. This sub brand equity may actually influence decisions of individuals.
The model uses maximum likelihood estimation for
H 2 and

H 1 and the MLM for

H 3 . I believe that the author failed to emphasize the importance of a

multinomial logit model in the paper. The reason why MLM works with the data is
because all the choices in the model should be mutually exclusive and exhaustive.
Meaning if an individual chooses a burger, the individual would not be able to choose
another choice. This way the model would be able to test the direct effect of brand equity
as well as the other variables to utility. It creates an odds ratio from the exponential
values of the utility from the alternatives but fails to use a logarithm function to limit the
index from 0-1, therefore creating a poor probability. The author also fails to mention the
importance of using a link function to link the odds ratio to the probability model. The
author however does well in setting up a base choice so that we could observe the
probability of transitioning from the benchmark category to the other alternatives.
Although the author again fails to establish is the benchmark category. He however sets
the choices as 1.1 for Mcdonalds, 1.2 for A&W, 1.3 for Harveys, 1.4 for Wendys, 1.5
for Burger king, and 1.6 for diary queen. This is clearly the proper form for regression.

Results
From the main effects model we find that, the highest brand equity is Harveys
and the lowest is Dairy Queen, while the highest utility for burgers is the single patty low
fat burger and for vegetarian burgers, the highest is the regular meat burger. For the salad
bar, the highest utility is derived from the free salad bar. Also, as price goes up utility
goes down. For service, the highest utility was derived from a sandwich prepared within
2-3 minutes. It also found that based on the T ratio, the burger values proved to be
insignificant, while the vegetarian burgers proved to be significant, but the market
favored real meat burgers.

For the direct brand effects and indirect marketing mix, the author found that
H 1 was not significant, and hence the market will not positively accept the
introduction of new products. For

H 2 and

H 3 we look at the salad bar variable

since the burger variable proved to be insignificant. The author provides a starting point
as the benchmark that basically represented the share of market capital per company
before any new product extensions were introduced. The finds were that a salad bar
introduced by Burger King increased its market share by nearly 20%. When Mcdonalds
introduced a salad bar, market share of Mcdonalds went up 7% while Burger Kings
market share went up 4%. When Mcdonalds and burger King both introduce a salad bar,
Mcdonalds market share went down 5% while Burger kings market share went up 13%.
Thus the paper accepts

H 2 and

H3 .

The author didnt actually use the benchmark model to show the likelihood of
transformation from the benchmark category to the other alternatives. Instead, the author
just showed the effects of the transition. Therefore the author didnt use the MLM to
show the odds ratio but rather to show the effects of a change. That was why there was no
logarithm to limit the probability between 0 and 1. The author then didnt use the random
utility model to measure the probability of changing between choice but rather used it to
measure the effects of a transition.

Conclusions and Recommendations

The author thus proved that in the given limited and selectivity biased data, brand
equity does play a role. I believe that this research is headed in the right direction in that
in attempts to use econometrics to better forecast the market. On a larger scale where in
the model could account for the censored data, and even make the model less biased and
inconsistent, I believe that a study like this would really help others. For the model, I
believe that there should be 2 done. One to check the effects of transitioning from a
benchmark category to other categories and another to check the likelihood of
transitioning from the benchmark category to the other alternatives. By knowing the
probability of a consumer of switching between brands, the companies would better be
able to cater to the needs of the market. This information would then better be able to
help marketing researches who aim to maintain a high level of brand equity.