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Models of Consumer Behaviour

Shail Patel and Antoine Schlijper, Unilever

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Consumer products such as shampoo or tomato sauce are designed so that they appeal to consumers, encouraging them to buy those products. To that end, the industrial R&D organisation tends to focus on understanding and manipulating product attributes. However, buying behaviour is not only a function of the product: it is also, and in some cases perhaps more so, a function of the consumer, his social environment of other consumers, the marketplace with its competing products, and the brand marketing strategy. In order to design the best product, it is necessary to understand not just the physics and chemistry of the product, but also the psychology of consumers and the sociology of consumer groups or networks.

Our goal is to have a model of the marketplace that describes certain aspects of consumer buying behaviour. There are two main parts to such a model:

A description of a population of consumers, which each choose (buy) repeatedly one of a number of competing brands (we can ignore the difference between product and brand in this case). This subdivides into a description of the behaviour of a single consumer (consumer psychology model), and of the collective behaviour of a group, in other words of the interactions between consumers (consumer sociology model). A description of brand management: agents (brand managers) change the attributes of a brand such as price or quality in response to events in the marketplace.

Traditional marketing models tend to focus on the second element, and treat the large number of consumers or customers in a very macroscopic, averaged way: e.g. they only look at market share for each brand. Thus a constant market share can be a result of a dynamic equilibrium, but this macroscopic viewpoint cannot see or describe this. Alternatively, one can focus on individual consumers and their buying behaviour, and try to derive observable large scale effects, like changes in market share. We see an analogy with the situation in physics: the traditional macroscopic view of thermodynamics was later shown to result from the averaged behaviour of populations of individual molecules (statistical physics).

Traditional market models are typically in the form of differential equations, e.g. describing market share as a function of time. It would already be interesting to consider adding (random) spatial variations, to account for different consumer preferences. In Appendix 3 we describe an agent based model on which we have performed simulation studies; here approaches from statistical physics may be useful. Also epidemiology may give ideas, or traffic flow models, and brand management may perhaps be approached with game theory. Ideally we would like to connect the microscopic consumer viewpoint to the macroscopic viewpoint of the brand manager with an encompassing description (again, analogous to statistical physics/kinetic theory/thermodynamics).

Three specific challenges we would like to pose to the Study Group are as follows, with further background given in appendices (of the pdf version of the problem):

Construct a market model that exhibits the decoy effect (explained in Appendix 1). Are customer interactions (social networks) needed for lock-in to occur (explained in Appendix 2), or can consumer psychology explain this (cf. Appendix 4)? How can we formalise consumer and market insights in a mathematical model? (E.g. so we can investigate under which conditions/assumptions brand sales figures exhibit non-Gaussian fluctuations. Observations have shown such.)

A valid model would need to show at least one or more of these effects qualitatively.

Further details are available in the pdf version of the problem description.

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