Choice Modeling and SEM

The paper shows how two dominant methodological approaches in quantitative marketing research of the last decades can be integrated. Combining the strengths of covariance structure analysis to control for measurement errors and the ability to predict choice behavior via the Multinomial Logit (MNL) model creates a powerful hybrid approach – the Integrated Choice and Latent variable (ICLV) model – for marketing research. We document the basic features of this approach and present an example which illustrates how the ICLV model can be used to explain travel mode choice. The hybrid modeling framework provides several advantages: (1) it gives a more realistic and comprehensive representation of the choice process taking place in the consumer’s “black box”; (2) it provides greater explanatory power; (3) it helps to remedy the biasing effect of neglecting important latent variables to explain choice behavior, thus allowing for a more accurate assessment of how marketing influences customers’ choice behavior.