Incorporating context effects into a choice model

Abstract

The behavioral literature provides ample evidence that consumer preferences are partly driven by the context provided by the set of alternatives. Three important context effects are the compromise, attraction, and similarity effects. Because these context effects affect choices in a systematic and predictable way, it should be possible to incorporate them in a choice model. However, the literature does not offer such a choice model. This study fills this gap by proposing a discrete-choice model that decomposes a product’s utility into a context free partworth utility and a context-dependent component capturing all three context effects. Model estimation results on choice-based conjoint data involving digital cameras provide convincing statistical evidence for context effects. The estimated context effects are consistent with the predictions from the behavioral literature, and accounting for context effects leads to better predictions both in and out of sample. To illustrate the benefit from incorporating context effects in a choice model, the authors discuss how firms could utilize the context sensitivity of consumers to design more profitable product lines.