6.Advanced Techniques of Market Analysis: A Brief Overview of Some Useful Concepts
6.2 Market Simulations
Given the following preferences, which product should we offer to this market?
Red exhibits the highest overall preference part-worth.
But no one in the market prefers Red.
Why Market Simulations? Competitive Effects Matter!
- Suppose, 80% of the market prefer round widgets and 20% prefer quadratic widgets
- What type of widgets should we bring into the market?
- Without additional information, the obvious choice is “round widgets”
- What if there are already 10 big competitors who are ALL offering round widgets?
Why Market Simulations?
- Simulations reflect the reality better than data driven models
- … in representing idiosyncratic preferences of segments and/or individuals
- … by accounting for preferences and for concurrent offerings in the market
- We must not necessarily gear ourselves to the “fat” part of the market in order to achieve good profits
- “Choice Lab” for testing a multitude of the real-world opportunities and their possible outcomes
- Results of simulations can be easily understood by and are actionable for the management
What Do Market Simulations Do?
The process of the market simulations is:
For each respondent, given his/her preference structure and exhaustive market representation (in terms of alternative product offerings) determine the respondent’s choice and/or choice probability of the product(s) of interest, thus obtaining market shares for each product.
This is done by applying choice rules, e.g.:
- First-Choice Rule (Maximum Utility Rule)
- chooses the product with maximum utility
- choice probability of such product is 100%, the remaining products have 0% choice probability
- BTL-Model (Bradley, Terry, and Luce)
- probability of choice depends on its relative utility share in the market
- non-zero choice probability of products with lower preference values / utilities
- Logit-Choice Rule
- probability of choice increases exponentially with increasing contrast of product utilities
- this rule allows a-priori adjustment to the real-world market shares