Marketing models of consumer heterogeneity

The distribution of consumer preferences plays a central role in many marketing activities. Pricing and product design decisions, for example, are based on an understanding of the differences among consumers in price sensitivity and valuation of product attributes. In addition, marketing activities which target specific households require household level parameter estimates. Thus, the modeling of consumer heterogeneity is the central focus of many statistical marketing applications. In contrast, heterogeneity is often regarded as an ancillary nuisance problem in much of the applied econometrics literature which must be dealt with but is not the focus of the investigation. The focus is instead on estimating average effects of policy variables. In this paper, we discuss various approaches to modeling consumer heterogeneity and evaluate the utility of these approaches for marketing applications.