Modeling patronage shift to a new entrant for predicting disproportionate losses for incumbent outlets

Abstract

In a retail market where market competition is intensifying due to increases in the numbers of outlets, an understanding of patronage-shifting behavior is critical to improving the prediction accuracy of changes in the market shares of existing outlets. Our objective is to understand consumers' patronage shift patterns in response to a new outlet. This study develops a patronage shift model by incorporating outlet characteristics which affect the choice set formation of consumers. Factors of interest to us are the accessibility of the new outlet, outlet awareness, and inter-outlet substitutability. An empirical analysis of the motion picture exhibition industry shows that (i) patronage loss is significantly disproportionate across incumbent movie theaters due to the asymmetric substitution effect, (ii) substitutability is more crucial than accessibility in accurately capturing disproportionate substitution patterns at the market level, (iii) the probability of a consumer being aware of a new theater increases gradually, (iv) modeling the growth pattern of outlet awareness plays a significant role in representing actual market responses more accurately, and (v) patronage patterns estimated by the proposed model from aggregate market share data are consistent with actual consumer responses. (c) 2012 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.