The Impact of Context Effects on Optimal Assortments

Context effects imply that consumer preferences depend on choice sets in a way that deviates systematically from the classical utility model. While context effects have been demonstrated in the literature, it remains unclear how manufacturers and retailers can use context effects for more profitable product lines and assortments. This study aims to fill this gap. We propose a choice model that decomposes a products utility into a context-free and context-dependent part. The latter part captures: the substitution effect (allowing for non-IIA choices), the attraction effect (accommodating the disproportionate gain of one item dominating another), and the compromise effect (capturing preferences for middle options). Model estimation results on choice-based conjoint data concerning digital cameras provide convincing statistical evidence that context effects exist in a repeated choice environment. Moreover, accounting for context effects leads to better predictions in holdout choice sets, including choice sets that are larger than the estimation sample choice sets. Subsequently, we show that accommodating context effects leads to assortments that are systematically different from assortments that ignore context effects. Moreover, the results suggest that context-based assortments may increase primary demand and profit. Information: Dr. K. Gielens, kgielens@rsm.nl, ext. 4088635