Homogeneity and heterogeneity in stochastic models of brand choice behavior

Heterogeneity of consumers is one of the cornerstones of empirical findings and theories in marketing. It serves, for example, as the foundation for such areas as market segmentation and product differentiation. This paper attempts to trace and clarify the evolution over the last twenty years of the homogeneity assumptions in the area of stochastic models of brand choice behavior. In analyzing individual choice behavior by means of stochastic models, all individuals were often assumed to possess the same set of transition probabilities or follow the same stochastic process. However, empirical studies at the individual level indicate that individuals are actually non-homogeneous in those probabilities and processes. In this article we provide an analytical proof that if the behavior of individuals is specified to be homogeneous when it is not, wrong inferences about the type of stochastic process individuals follow and about the expected behavior of the total population will be drawn. Ways to remedy these problems by allowing for heterogeneity are reviewed. The implications of heterogeneity and our findings in the various application areas which utilize stochastic choice models are examined.