Individual Choice Models

Abstract

Choice models have the important limitation in that the estimation is typically carried out at the aggregate rather than at the individual level. Implicitly, these models assume homogeneity of preference structures, which is a very restrictive assumption. To relax this assumption, several researchers have recently suggested the use of latent class models based on choices to estimate segment-level as opposed to aggregate-level preference structures (e.g., DeSarbo et al. 1995, Kamakura and Russell 1989, Wedel and DeSarbo 1993). While these models significantly limit the problem of preference heterogeneity, it still remains. Taking the idea of segmentation to its logical extreme, the most homogeneous group involves segments of size one, avoiding the heterogeneity problem completely.