Research Note - A Cross-Category Model of Households' Incidence and Quantity Decisions

This paper advances the literature on multicategory demand models by simultaneously handling more than one purchase decision of the household. We propose a two-stage bivariate logit model of incidence and quantity outcomes in multiple categories. Our results show that cross-category promotional spillovers are asymmetric between the two product categories of bacon and eggs. The total retail profit responds more to bacon price than to egg price. Promoting bacon is found to have a bigger impact on egg profit than the impact of egg promotion on bacon profit. We decompose (1) the total retail profits, as well as (2) the cross-category profit impact of a price promotion, into its two components, and find that (1) 23% (67%) of the total retail profit impact of a promotion on bacon (eggs) arises on account of quantity effects, and (2) 40% (33%) of the increase in egg (bacon) profit from promoting bacon (eggs) is on account of quantity effects.

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