Spatial Models in Marketing
ABSTRACT Marketing science models typically assume that responses of one entity (firm or consumer) are unrelated to responses of other entities. In contrast, models constructed using tools from spatial statistics allow for cross-sectional and longitudinal correlations among responses to be explicitly modeled by locating entities on some type of map. By generalizing the notion of a map to include demographic and psychometric representations, spatial models can capture a variety of effects (spatial lags, spatial autocorrelation, and spatial drift) that impact firm or consumer decision behavior. Marketing science applications of spatial models and important research opportunities are discussed. Copyright Springer Science + Business Media, Inc. 2005
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ABSTRACT: Abstract Spatial variation in attitudes plays an important role in decisions on geographical marketing efforts, such as targeting of direct mail campaigns and scheduling of sales representatives. Similarly, for financial service companies, it is important to schedule their financial planners across servable geographical regions based on the spatial heterogeneity in consumer preferences and attitudes towards financial products. However, studying these attitudes is difficult because they are latent in nature, often spatially correlated, and data might be sparse for some regions. To address these challenges, we propose a heterogeneous spatial factor analytical model which allows extracting spatially correlated latent factors. The model,is implemented in a Bayesian framework,dealing with the sparse data problem,by regions borrowing,information,from
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ABSTRACT: Traditional CRM models often ignore the correlation that could exist among the purchasing behavior of surrounding prospects. Hence, a generalized linear autologistic regression model can be used to capture this interdependence and improve the predictive performance of the model. In particular, customer acquisition models can benefit from this. These models often suffer from a lack of data quality due to the limited amount of information available about potential new customers. Based on a customer acquisition model of a Japanese automobile brand, this study shows that the extra value resulting from incorporating neighborhood effects can vary significantly depending on the granularity level on which the neighborhoods are composed. A model based on a granularity level that is too coarse or too fine will incorporate too much or too little interdependence resulting in a less than optimal predictive improvement. Since neighborhood effects can have several sources (i.e. social influence, homophily and exogeneous shocks), this study suggests that the autocorrelation can be divided into several parts, each optimally measured at a different level of granularity. Therefore, a model is introduced that simultaneously incorporates multiple levels of granularity resulting in even more accurate predictions. Further, the effect of the sample size is examined. This shows that including spatial interdependence using finer levels of granularity is only useful when enough data is available to construct stable spatial lag effects. As a result, extending a spatial model with multiple granularity levels becomes increasingly valuable when the data sample becomes larger.Journal of Intelligent Information Systems 41(1). · 0.83 Impact Factor
Marketing Letters 16:3/4, 267–278, 2005
c ? 2005 Springer Science + Business Media, Inc. Manufactured in the Netherlands.
Spatial Models in Marketing∗
ERIC T. BRADLOW
University of Pennsylvania
GARY J. RUSSELL
University of Iowa
University of Wisconsin
DAVID R. BELL
University of Pennsylvania
SRI DEVI DUVVURI
University of Iowa
FRANKEL TER HOFSTEDE
University of Texas, Austin
Imperial College, London
New York University
Marketing science models typically assume that responses of one entity (firm or consumer) are unrelated to
responses of other entities. In contrast, models constructed using tools from spatial statistics allow for cross-
sectional and longitudinal correlations among responses to be explicitly modeled by locating entities on some
type of map. By generalizing the notion of a map to include demographic and psychometric representations,
spatial models can capture a variety of effects (spatial lags, spatial autocorrelation, and spatial drift) that impact
firm or consumer decision behavior. Marketing science applications of spatial models and important research
opportunities are discussed.
∗This paper is based upon the discussions of the Spatial Models in Marketing seminar at the Sixth Invitational
Choice Symposium, June 2004. Eric T. Bradlow, Bart Bronnenberg and Gary J. Russell served as co-chairs of the
BRADLOW ET AL.
A consumer’s decision to adopt a new Internet service is affected by interactions with
other consumers who live in the same postal code area (Bell and Song, 2004). The utility
weights used by consumers to determine satisfaction ratings vary geographically due to
the impact of demographics and lifestyle on choice behavior (Mittal et al., 2004). Retailers
develop promotional policies based on the policies of other retailers in the same trading
area (Bronnenberg and Mahajan, 2001). Each of these is an example of a marketing context
in which the spatial location of a decision-maker plays a key role in the choice process. In
each instance, the spatial component creates a process in which the choice outcomes of one
individual are related to the choice outcomes of other individuals.
The basic tool for constructing models of choice interdependence is the stochastic theory
of spatial statistics (Anselin, 1988; Ripley, 1988; Cressie, 1993; Haining, 1997). Simply
put, spatial models assume that individuals (or, more generally, units of analysis, such as
postal codes) can be located in a space. Typically, responses by individuals are assumed
to be correlated in such a manner that individuals near one another in the space gen-
erate similar outcomes. (In a competitive context, individuals might generate dissimilar
(negatively correlated) outcomes.) The methodology can integrate complex spatial cor-
relations between entities into a model in a parsimonious and flexible manner. Because
spatial statistics was originally developed as a modeling tool in the physical and biolog-
ical sciences, much of the older literature in spatial statistics emphasizes the use of a
geographical map. In marketing, however, it is more appropriate to regard the space as
any type of map—geographic, demographic or psychometric—that describes the relation-
ship among individuals (or units). By generalizing the notion of a map, we can define a
spatial model as a stochastic model which uses known or unknown (latent) relationships
The goal of this paper is to present a brief overview of spatial models in marketing
science. We begin by defining the elements of a spatial model: a map, a distance metric,
and model of spatial effects. We emphasize that the researcher need not use geography in
developing an interesting and useful model. We then consider issues of model specification
and calibration. We conclude with suggestions for new research in spatial models.
Constructing Spatial Models
The key assumption in the traditional marketing science literature is that the behavior of
one individual is conditionally independent of the behavior of another individual. Although
researchers in marketing science now routinely pool information across individuals to al-
low heterogeneity in parameters (Allenby and Rossi, 1998), the underlying model is still
constructed by assuming that each individual acts in isolation while making a decision.
In contrast, spatial models posit that a richer understanding of behavior can be obtained
by assuming the actions of different individuals are correlated. The key questions are why
these relationships exist and how they may be modeled.
SPATIAL MODELS IN MARKETING
Typology of Spatial Models
All spatial models are constructed using a number a key components. In addition to an
outcome variable y, we assume that the researcher has available a set of covariates X and a
set of spatial relationships Z. Examples of X include product attributes, demographics and
marketing mix elements. In some cases, X can include lagged values of y, both over time
and across individuals. The identity of the variables in Z largely depends on the applica-
tion. However, Z can be viewed as the location of each individual on some type of map.
Unlike X, the location information in Z is typically assumed to be exogenous. (However, in
some applications, map positions Z are treated as parameters and estimated in the course of
the analysis (see, e.g., DeSarbo and Wu, 2001).) Finally, a spatial model includes a vector
of parameters ? that determines the relationships among y, X and Z. Formally, the task
of the researcher is to study the decision process by computing a reasonable estimate of ?
from the available information.
Using this notation, we can define two general types of spatial models of interest to
researchers in marketing. Type I models, denoted by the notation f (y|X, Z, ?), predict
the choice outcome y, conditional on the X variables and the map locations. Type I mod-
els constitute the vast majority of models considered in regional sciences (Cressie, 1993,
Haining, 1997) and in spatial econometrics (LeSage, 1999; Anselin, 2001, 2002). The
simplest models in this area are spatial regression models with the general specification
y = Xβ + e,
e ∼ N(0,?(Z,θ))(1)
where ?(Z, θ) denotes a properly specified covariance matrix in which the correlations be-
tween the responses of two individuals is monotonically decreasing in the distance between
the individuals on the map. Because the errors in (1) have a spatial correlation pattern, the
model can be used to predict the outcome variable of one individual at a specified location
by using the known responses and locations of all other individuals. This approach, known
as kriging, has been used in a marketing context to develop more accurate market-level
estimates of brand sales (Bronnenberg and Sismeiro, 2002). We consider more complex
Type I models later in this article.
TypeIImodels,denotedbythenotation f (Z | X, y,?),reversethelogicofthemodeling
process. Instead of predicting outcome variables y, we predict the locations Z at which
certain outcomes occurred. Models in this form are not generally discussed in the spatial
For example, consider the Path Tracker system developed by Sorensen Associates for
category management applications (Murphy, 2004; Sorensen Associates, 2004). Using
an RFID system, the locations of a consumer’s grocery cart in the store are recorded
over time, Zt, providing information on the relationship between store layout and pur-
chasing activity. Applied to these data, a Type II model would predict the consumer’s
path through the store, given information on purchases y, consumer characteristics X1
(Larson et al., 2005), and possibly, most importantly, store layout X2. That is, as marketing
BRADLOW ET AL.
managers experiment with store layouts, a more detailed analysis can be done to un-
derstand its impact not solely on end outcomes (y = sales), but on the traffic effect
of that design. In this way, manufacturers can begin to tease apart whether sales re-
sults may be due to poor traffic (awareness and consideration) or due to the product
mation is used in consumer behavior experiments (Wedel and Pieters, 2000). For instance,
the fundamental behavioral process. One additional area in which the outcome Z may be
of interest is in market basket analysis (Manchanda et al., 1999) when the order in which
before, store layout. In contrast to Type I models, Type II models do not generally make
use of the tools of spatial statistics. For this reason, we restrict attention to Type I models
in the remainder of this article.
Maps and Distance Metrics
Clearly, the most distinctive element of spatial models is the existence of a map. In regional
sciences and spatial econometrics, the map is typically geographical in nature, indicating
to the role of time in time series models: spatial models typically assume that proximity
on the map implies high correlation in the response variables. However, in contrast to time
series models, the map is multidimensional—two or more dimensions—and can imply a
rich variety of spatial relationships. For example, in ecological studies, spatial correlations
are stronger in some directions (east-west) than others (north-south) due to prevailing wind
patterns (Cressie, 1993). Similarly, spatial models in marketing often seek to differentially
and Mahajan, 2001; Yang and Allenby, 2003).
The selection of an appropriate map is of singular importance in spatial modeling. In
for marketing applications. The space in a spatial model represents additional variables
(such as social networks, lifestyles or trading areas) that are not directly observed by the
researcher, but which are likely to determine the response variable. For example, Yang and
Allenby (2003) use both postal codes and demographics in defining the social network
of consumers. Moon and Russell (2004) base their analysis solely on a pick-any map of
consumer ideal points (a latent map), ignoring geographical location entirely. Clearly, the
selection of a map implies an assumption about the variables that determine the relative
similarities of individuals.
Once a map has been selected, a distance metric must be defined. Again, the researcher
the consumers on the map and θ > 0 is a parameter to be estimated. Cressie (1993) and
SPATIAL MODELS IN MARKETING
Figure 1.Definition of Neighborhood.
Haining (1997) provide extensive discussions on the specification of covariance structures
using both Euclidian and non-Euclidian (spherical) geometry.
In many applications, however, a continuous measure of distance is not appropriate. This
typically occurs when the unit of analysis is a collection of many individuals such as postal
code area, county or state. For example, Bell and Song (2004) model the probability that at
least one individual in a postal code area has purchased groceries from netgrocer.com at a
of a target postal code as all other postal codes that share boundaries with the target. For
row conditional: the pattern of ones and zeros identifies all postal codes that are neighbors
of the postal code in the given row. (For reasons of model identification, the main diagonal
of C is set to zero.) Prior to model specification, the contiguity matrix is usually converted
into a row standardized spatial lag matrix W by rescaling the rows of C to sum to unity.
There are two reasons to prefer a neighborhood structure over a continuous distance
metric, when scientifically appropriate. First, as in Bell and Song (2004), the logic of the
particular application may dictate the use of a contiguity matrix. For example, a neighbor-
hood structure is the appropriate choice to represent a social network. A hybrid approach
is provided by Anselin (2002). He suggests that distance between economic agents be de-
termined by counting the number of nodes separating the agents on a graph representing
the social network In this context, the elements of the contiguity matrix C are integers and
the W matrix is a function of the inverse of these integers. Yang (2004) argues for a gen-
eralized contiguity matrix C that permits the possibility that influence between individuals
is asymmetric (e.g., opinion leaders impact opinion followers more than followers impact
BRADLOW ET AL.
Second, in any spatial analysis, there will always be some individuals located near the
edges of the map. When a continuous distance metric is adopted, these individuals have
less surrounding points than those in the interior of the map. This can lead to biases in
model parameters and poor forecasts at the edges of the map. A compromise is to define a
neighborhoodasthe K nearestindividualsusingaEuclidiandistancemetric.Thisdefinition
also has the useful property that individuals located in a sparse region of the space will have
the same number of neighbors as those in a dense region of the space. (However, given the
larger distances, the impact of these individuals may be smaller in magnitude.) In effect,
the Euclidian measure of unit distance is allowed to be larger when in sparse regions of the
map. Haining (1997) provides an extensive discussion of the statistical problems of edge
effects and possible solutions.
Modeling Spatial Effects
Spatial models can represent three different types of spatial patterns. Two of these effects
have already been briefly discussed. First, using the W matrix noted above, spatial models
can capture spatial lags, the idea that the individuals are directly affected by the known
decisions of other individuals (Yang and Allenby, 2003; Bell and Song, 2004). Models of
this sort are of particular interest in applications, such as spatial econometrics, in which
economic agents are known to interact during the choice process. Second, as shown in
equation (1), spatial models can capture spatially correlated errors, the idea that important
latent variables that drive purchase behavior can be inferred from consumer proximity on
the map (Russell and Petersen, 2000; Bronnenberg and Sismeiro, 2002; Yang and Allenby,
2003). (Similar work by Chintagunta et al. (2004) shows how omitted variables induce
a form of time and brand spatial dependence.) Models of this sort can be regarded as a
statistical adjustment for missing variables that determine the response variable, but are not
available to the researcher.
Third, spatial models can capture spatial drift, the idea that model parameters are a
function of an individual’s location on the map (Brunsdon et al. 1998; Fotheringham et al.
2002). Models of this sort can be regarded as a representation of unobserved heterogeneity
in which the parameters (as opposed to the response variables per se) follow a spatial
process. The theoretical justification for this type of model strongly depends upon the
application. For example, Mittal et al. (2004) argue that geography dictates the parameters
Kannan (2003) argue that spatial patterning of utility model parameters can be expected
because geographical location is a surrogate for the demographics that determine consumer
The book by Fotheringham et al. (2002) provides an extensive discussion of a class of
spatial drift models known as Geographically Weighted Regression (GWR). A Bayesian
estimates, is discussed by LeSage (2003). By exploiting a relationship between GWR and
weighted maximum likelihood estimation, Duvvuri et al. (2004) develop a logit model with
spatial drift. Intuitively, a GWR estimator can be regarded as an Empirical Bayes estimator
SPATIAL MODELS IN MARKETING
where the prior for a particular individual is based upon the neighborhood structure of the
Formally, we can write a model specification which includes all three types of spatial
effects by generalizing equation (1) as
y = ρWy + X β[Z] + e,
where β[Z] is a continuous function of the map coordinates Z and ρ > 0 is a scalar
parameter. In this structure, ρWy represents spatial lag effects, ?(Z, θ) represents spatial
correlation effects, and β[Z] represents spatial drift effects. The response variable y in
equation (2) is typically assumed to be an observable outcome such as brand sales. Note
computational approach to these types of models.
y with a continuous latent utility variable u
e ∼ N(0,?(Z,θ))(2)
u = ρWu + X β[Z] + e,
and by linking u to observed choice using a random utility theory argument. Although this
generalization is simple in principle, it may not be appropriate for all marketing science
applications.Forexample,thespatiallagtermρ Wu impliesthattheutilityofoneindividual
is influenced by the utilities of other consumers. This is clearly not the same as assuming
that a given consumer’s choice is influenced by the observed choices of other consumers
(Anselin, 2002). Although ρ Wu can be replaced by ρ Wy (thus, inducing a form of state-
space dependence), model calibration must be approached carefully because the u values
are correlated and u determines y.
Equation (2) can also be generalized to deal with cross-sectional time series data by
allowing time to impact the model components as
e ∼ N(0,?(Z,θ))(3)
y(t) = ρWy(t) + X β[Z,t] + e(t),
where the errors e(t) are correlated over time according to some stationary time series
process. These models, known as spatio-temporal models, have been extensively studied
in the biostatistics literature (see, e.g., Waller et al., 1997). Because spatio-temporal mod-
els provide considerable flexibility in capturing different types of dependence, they offer
researchers in marketing science a promising direction for new work.
e(t) ∼ N(0,?(Z,θ))(4)
interdependence in calibrating spatial models. Note that equation (2) can be rewritten as
y = [(I − ρW)−1X]β[Z] + v,v ∼ N(0,(I − ρW)−1?(Z,θ)(I − ρW?)−1)
BRADLOW ET AL.
where v = ρWv + e can be interpreted as a spatially-lagged error structure. Even when
the original errors e are not spatially correlated (i.e., ?(Z, θ) is a diagonal matrix), all
outcome variables y will be correlated due to the spatially-lagged error v. An analogous
propertyholdsforchoicemodelsconstructedbyreplacing y bylatentutilitiesu.Inpractical
terms, interdependence means that calibration of a spatial model is considerably more
complex than calibration of a traditional marketing science model because the standard
technologies such as simulated maximum likelihood and Markov Chain Monte Carlo are
apt to be attractive choices for the applied researcher (Tanner, 1996; Train, 2003).
In calibrating a spatial model, the researcher needs to be aware that the general model
in equation (2) cannot be aggregated analytically without changing the model structure.
Aggregation in this context refers to grouping of individuals (e.g., analyzing segments in-
stead of consumers) or aggregating geographical areas (e.g., analyzing counties instead
of postal codes). This general issue, known in the spatial statistics literature as ecolog-
ical fallacy or the modifiable areal unit problem, implies that spatial effects present at
one unit of analysis may not be observed at another unit of analysis (Anselein, 2001,
2002). Sismerio (2004) addresses this problem by developing a generalized spatial model
which simultaneously incorporates the different spatial effects for different levels of anal-
ysis. Using simulated data, she shows that both local and large-scale effects can be re-
covered if the model is appropriately specified. In general, the researcher should select
a scale for the model specification which coincides with the intended use of the model
Spatial models are interesting new tools for analyzing interdependence in behavioral out-
ing science. Our intent is to highlight aspects of spatial modeling that present opportunities
for future research.
Spatial data present a number of challenges for the researcher. The most obvious character-
istic of spatial data is the sheer amount of information that must be stored. Specialized data
storage formats, data retrieval tools and data presentation software now exist in the form of
geographical information systems (Rigaux et al., 2002). GIS software tools emphasize the
use of efficient strategies for representing spatial information. For example, consider again
thecontiguitymatrixC inFigure1.Althoughthistypicallyisalarge N by N matrix(where
N is the number of individuals in the analysis), the number of ones (denoting neighbors) in
ones in C, the amount of data storage required is greatly reduced. Statistical software (such
as the Matlab spatial statistics toolbox) which allows for sparse matrix representations can
significantly reduce the time needed to calibrate a spatial model (LeSage, 1999).
SPATIAL MODELS IN MARKETING
Several approaches exist that address the dimensionality problem of spatial models. An
a model based upon a Markov Random Field (Besag, 1974, 1975). The main difficulty of
this approach is the need for “severe restrictions on the available functional forms of the
conditional probability distributions in order to achieve a mathematically consistent joint
a conditional autologistic model and constrain the pairwise relationship between locations
to be symmetric. In order to avoid the computation of a mathematically intractable joint
likelihood function, parameters are estimated using a pseudo-likelihood algorithm based
upon the conditional probability distributions.
Recent developments in the estimation and inference of joint autoregressive models with
the large data sets also limit the number of direct relationships among locations. The goal is
ing maximum-likelihood and Bayesian estimation). For example, Pace and Barry (1997,
1999) provide algorithms to quickly compute maximum-likelihood estimates when the de-
pendent variables (or its errors) follow a general spatial autoregressive process with few
direct relationships. LeSage and Pace (2000) introduce the matrix exponential spatial spec-
ification (MESS) that relies on a specific spatial transformation of the dependent variable.
Pace and Zou (2000) provide closed-form maximum-likelihood estimates for the particular
case of nearest-neighbor spatial dependence (allowing only one other location, the nearest-
sions for the conditional distributions central in Bayesian estimation of nearest-neighbor
models that avoid complex matrix computations.
Analysis of Marketing Policies
Spatial data can be used to understand the geographical patterns of marketing variables.
In this context, the X variables may be endogenous to the model. For example, Anderson
and de Palma (1988) study regional patterns of price discrimination, taking into account
delivery costs and manufacturer locations. Using information on the location of consumer
residences, Thomadsen (2004) calibrates a choice model for banking services and develops
recommendations for optimal placement of automatic teller machines. Bronnenberg et al.
distribution dependent on order of entry into the region and the (endogenously determined)
regional levels of advertising expenditure.
A promising use of spatial models in marketing science is the correction of endogeneity
in marketing mix response models (Bronnenberg and Mahajan, 2001; Bronnenberg, 2004).
They propose to jointly model the marketing mix and the response variables by modifying
the spatial regression model of equation (1) to models of the type
y = τ + X(τ)β + e1,
X(τ) = μ + λτ + e2,
BRADLOW ET AL.
where τ are error components that follows a spatial lag pattern and X(τ) is (partially)
dependent on τ. In words, this model asserts that the base level of the response y exhibits a
spatial pattern. Moreover, this base level is used by marketing managers to set the observed
marketing mix expenditures (such as advertising budgets) found among the X(τ) variables.
A representation of this sort both corrects biases in the estimation of β and provides a
structural view of managerial decision rules with respect to marketing mix variables. An
analysis based upon equation (6) is particularly important if the goal of the research is to
develop optimal policy recommendations for marketing managers.
Interpretation of Spatial Effects
Most researchers in marketing are interested in spatial models primarily as a means of
understanding choice behavior. Yang and Allenby (2003) and Bell and Song (2004) use
spatial models to measure the impact of social influence on choice behavior. Ter Hofstede
et al. (2002) use spatial priors (in a hierarchical Bayes analysis) to understand geographical
dispersion of preference segments in Europe. Ter Hofstede (2004) extends this work by
linking spatial segmentation to the means-end chain framework (in which abstract values
lead to desired benefits which lead, in turn, to desired product features). For each of these
examples, the structure of the spatial model suggests that specific behavioral mechanisms
determine choice outcomes.
In this context, it is important to understand the spatial models—like most statistical
models—may not be informative about the constructs underlying behavior. However, a
researcher can persuasively argue for one type of spatial mechanism versus another by
Arora (2004) argues that spatial models could be an effective tools in studies of group
decision-making (see, e.g., Arora and Allenby, 1999; Aribarg et al., 2002). Because the
data collection process would include direct observation of dyadic interactions (such as
discussions between parent and child), the researcher would be justified in using a spatial
knowledge of the application area must guide the use of spatial models. For this reason,
joint work between behavioral and quantitative researchers should be encouraged.
Spatial models are a new research area in marketing science. Because spatial models allow
for correlations in response variables across individuals, they represent an entirely new way
of understanding decision processes. Major opportunities exist for researchers who under-
stand the methods of spatial statistics and can craft specialized models to study substantive
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