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A Simultaneous Model of Consumer Brand Choice and Negotiated Price

Leonard N. Stern School of Business, New York University, New York, New York 10012
Leonard N. Stern School of Business, New York University, New York, New York 10012
Department of Marketing, Hong Kong University of Science and Technology, Clearwater Bay, Kowloon, Hong Kong
ychen{at}stern.nyu.edu
shayang{at}stern.nyu.edu
mkyzhao{at}ust.hk

In this paper, we develop a simultaneous model of consumer brand choice and negotiated price in the highly relevant marketing context of automobile transactions. Consumer brand choice is modeled as a multinomial probabilistic outcome, and the individual consumer-level transaction price is modeled to be consistent with the Nash bargaining solution. Our simultaneous model introduces a natural way to account for price endogeneity in a microlevel choice setting when the price paid is individual specific and correlated with the idiosyncratic preference of a buyer. It also accounts for the potential selectivity bias in studying the negotiated price by integrating consumer brand choice modeling. We apply the proposed model to a data set of 4,795 consumer automobile purchases. The empirical results show that the proposed approach not only better fits the data of consumer choice and negotiated price, but it also provides additional insights into buyers' and sellers' behaviors in comparison with models that study only consumer choice or the negotiated price, but not both simultaneously.

Key Words: choice models; negotiation; simulation-based estimation methods
History: Received: March 23, 2006;