The Impact of Context Effects on Optimal Assortments

The context provided by the set of alternatives under consideration affects consumer choice. To accommodate such context effects, this paper proposes a choice model that decomposes a product’s utility into a context-free component and a context-dependent component capturing substitution, attraction, and compromise effects. Model estimation results on choice-based conjoint data concerning digital cameras provide convincing statistical evidence that the anticipated 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, the authors show that accommodating context effects leads to assortments that are systematically different from assortments that ignore context effects. The results suggest that context-effect based assortments may increase primary demand and profit