ECONOMETRIC INSTITUTE

ERASMUS UNIVERSITY ROTTERDAM

Exam FORECASTING IN MARKETING (FEW7384)

Monday, December 18,

9.30 – 12.30

This exam contains 5 numbered pages

(a basic calculator may be used during this exam)

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Question 1
Indicate if the following statements are true or false. Give a short motivation for each
answer!
a). The Negative Binomial count model is equivalent to a Poisson count model with a
particular form of heterogeneity.
b). If one is uncertain about the distribution of heterogeneity in a model, one can best
use a mixture approach.
c). If the variance is misspecified, parameter estimates based on a Poisson count model
are inconsistent.
d). The median should be used as the optimal forecast if one is worried about very large
forecast errors (compared to using the expected value as forecast).

Question 2 – Sales models

The product manager of Stuff Unlimited wants to gain insight in the determinants of the
sales of his products. He hires a researcher who proposes to use the following model

log St = α + β log Pt + γDt + δFt + εt , t = 1, . . . , T (1)

where St denotes the sales at time t, Pt denotes the price and Dt and Ft are 0/1 indicators
for display and feature, respectively.
a). Relative to a period without promotion, specify (in terms of the model parameters)
the percentage increase in expected sales for the following three cases (i) display, no
feature, (ii) no display, feature, and (iii) display and feature.
b). Extend the model specification such that it allows for the fact that a joint display and
feature promotion would lead to a smaller or larger sales increase compared to case
(iii) of the previous question. Describe the interpretation of the new parameter(s).
The manager thinks that price changes will not only have a direct effect but also an effect
on the future. The analyst proposes the model

log St = α + ρ log St−1 + β1 log Pt + γ1 Dt + δ1 Ft + β2 log Pt−1 + γ2 Dt−1 + δ2 Ft−1 + εt . (2)

c). For display and feature the manager thinks that there is only a direct effect. To
test this hypothesis the analyst wants to perform a statistical test. What parameter
restriction(s) should be tested?

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Question 3 – New Products
The manager of Gadgets Inc. wants to know who are the first to buy his products. One
year after the introduction of one of his new products he runs a survey to collect data on
the personal characteristics of people who have bought the product and people who have
not bought the product. He collects the following information on a random selection of
individuals.
Variable name Description
Boughti 0/1 indicator if the respondent has bought the product or not
Timei Time between introduction of the product and purchase in months
(only for those who have bought the product)
Genderi 0 for male, 1 for female
NoProductsi Number of products of Gadgets Inc. previously bought
Cityi 0/1 indicator, 1 if the respondent lives in one of the major cities
Agei Age of the respondent
Incomei Monthly personal income in euro’s

First of all he asks an econometrician to analyze the decision to buy or not. To do this he
specifies a logit model to explain the variable Boughti . He obtains the following results
Variable Estimate Standard error
Intercept -3.018 0.598
Genderi -0.151 0.045
NoProductsi 0.198 0.098
Cityi 0.051 0.151
Agei -0.0256 0.00898
Incomei 0.00115 0.00045

a). Give an interpretation to each parameter estimate.

b). For a particular individual the model predicts a purchase probability of 0.45. Calcu-
late the partial effect of the income on the decision to buy for this person. Also give
the interpretation for this number.
c). When considering the fit of the model the researcher finds out that the fit is rather
bad for the age group below 20 years. Give a possible reason for this finding (think
of correlations between variables). Also propose an appropriate way of fixing this.
d). Can this model be extended by also including Timei as one of the explanatory vari-
ables? Explain why or why not.

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Using the variable Timei the researcher can find out when the product was bought for
each respondent. Using this variable he has constructed the following graph
0.40
Percentage of respondents who bought before t

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0 5 10 Time in months (t)

e). Describe in detail how the survey results can be used to obtain an estimate of the
long run total proportion of people that is going to buy this product at least once.
Indicate what model you would use, give the specification of the model and give the
interpretation for all parameters.

Question 4 – Market Shares

Consider the following market share attraction model
I
Y
γi δ α
Ait = exp(αi + εit ) exp(Dit ) exp(Fit ) Pjtji , (3)
j=1

for i = 1, . . . , I , t = 1, . . . , T and where Dit and Fit are 0/1 indicators for display and
feature of brand i at time t, Pit is the price of brand i at time t, and finally (ε1t , . . . , εIt ) ∼
N (0, Σ) with  
σ12
 σ12 
 
Σ= . . .
 . 
2
σI
a). Give one reason why one would consider to model market shares instead of sales.
b). Explain why the exponential transformations of display and feature have to be used.
c). For each model component (display effect, feature effect, price effect, and the error
terms) give the name of the specification or the restrictions imposed.
d). Give the expression for the reduced form model, that is, the model that can be used
to estimate the parameters.
e). Specify which (functions) of the parameters are identified.

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Question 5 – Conjoint Analysis
For the specification of a new public transport system between Utrecht and Rotterdam, a
company is researching the preferences of commuters. The research company has decided
to perform a choice based conjoint analysis study.
a). Describe a conjoint approach that can be used as an alternative to the choice based
conjoint approach.
In the conjoint study particular options for the transport system are coded using the
following attributes and levels
Travel time Number of stops Design Price/km Seating
15 min 2 Train 0.05 Only standing
20 min 5 Subway 0.10 Guaranteed seating
25 min 10 Light rail 0.15 Seating/standing
30 min 0.25
40 min 0.50

b). Of course for almost all attributes we can easily indicate the preferred level. Describe
what the added value is of performing the conjoint analysis.
The model used to describe the utility of a particular option is

U (xi ) = V (xi ) + εi with

V (xi ) = µ + αTravelTimei + β1 D2 stops,i + β2 D5 stops,i + β3 D10 stops,i
(4)
+ ω1 Dtraini + ω2 Dsubwayi + ω3 Dlight raili
+ γPricei + δ1 Dseats,i + δ2 Dstanding,i + δ3 Dseats/standing,i ,

where the D-variables denote dummies for particular levels of the attributes, εi has an
extreme value distribution and xi is a vector that collects all the attribute levels.
c). Not all parameters in (4) are identified. Indicate what kind of restrictions need to be
imposed. Explain why!
The research company has selected a number of respondents and has asked each respon-
dent to answer 10 choice tasks. In each choice task the respondent needed to choose the
best alternative out of a set of three. A selection of the estimated parameters is presented
below
Parameter Estimate
Travel time (α) -0.115
D5 stops (β2 ) -0.191
D10 stops (β3 ) -0.423
Price (γ) -1.519

d). Calculate willingness to pay per kilometer for a one minute shorter travel time and
calculate the willingness to pay for reducing the number of stops from 10 to 5.