Monday, March 3, 2014
Roger Lederman, IBM Research, Marcelo Olivares, Columbia University - Columbia Business School - Decision Risk and Operations; University of Chile - Departamento de Ingenieria Industrial and Garrett Van Ryzin, Columbia Business School - Decision Risk and Operations are Identifying Competitors in Markets with Fixed Product Offerings.
ABSTRACT: We develop a novel methodology to identify competitors in markets where spatial location is an important factor of differentiation. In differentiated product markets, determining the key competitors of a focal product requires a characterization of customer demand that includes the identification of heterogeneous customer segments. The prevalent approach to characterize such a demand system is through a random utility model of customer choice. The existing methods used to estimate these models based on aggregate product sales data exploit variation in the set of product offerings to identify customer heterogeneity. Our proposed methodology uses a different empirical strategy: we use variation in observable attributes that determine the size of the distinct customer segments. This approach is useful to study markets where the set of product offerings and their characteristics are fixed or change infrequently. We apply our methodology in the hotel travel industry, where the characterization of key competitors is commonly used in practice to benchmark hotel performance. We collect publicly available data on local events to explain variation in customer segments, differentiating events by location and business/leisure purposes. Our methodology can be used effectively to characterize customer heterogeneity and identify the closest competitors to any focal hotel.