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The Additive Risk Model for Purchase Timing

John M. Olin School of Business, Washington University, Campus Box 1133, One Brookings Drive, St. Louis, Missouri 63130-4899
seethu{at}olin.wustl.edu

This paper proposes the Additive Risk Model (ARM), first used by Aalen (1980), to explain households' interpurchase times. Unlike the Proportional Hazard Model (PHM), first proposed by Cox (1972), the ARM incorporates the effects of covariates on the individual hazard function in an additive (as opposed to multiplicative) manner. While a large number of previous studies on interpurchase timing have dealt with the question of correctly specifying the parametric distribution for interpurchase times, no study has explicitly investigated the question of correctly specifying the effects of covariates in the model. This study looks at this issue.

We propose an ARM that is suitable for purchase-timing data, and compare its empirical performance to that of the PHM and the Accelerated Failure Time Model (AFTM) using scanner panel data on laundry detergents, paper towels, and toilet tissue. We find that the ARM not only estimates and validates the observed interpurchase times better than existing models, but also recovers a time-varying price elasticity and shows a high degree of robustness in the estimated covariate effects to alternative parametric specifications of the baseline hazard. The estimates of covariate parameters under the PHM, on the other hand, are highly sensitive to alternative parametric specifications of the baseline hazard.

Key Words: purchase timing models; additive risk model; proportional hazard model; accelerated failure time model; log-logistic hazard
History: Received: March 25, 2002;

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