6.Advanced Techniques of Market Analysis: A Brief Overview of Some Useful Concepts

6.2 Market Simulations


Market Simulations

Given the following preferences, which product should we offer to this market?

Blue Red Yellow
Respondent #1 50 40 10
Respondent #2 0 65 75
Respondent #3 40 30 20
Average 30 45 35

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
  • To the table of contents