A Customer Choice Model with HALO Effect

Abstract: In this paper, we propose an extension to the multinomial logit (MNL) model, the Halo MNL, that takes into account the interaction effects among products in an assortment. In particular, this model incorporates pairwise interactions of items in an effort to describe positive/negative effects among products that are present/absent in the assortment. Furthermore, we are interested in establishing sufficient conditions for identifiability, in order to build robust estimation methods. Under strict identifiability conditions, we use maximum likelihood to estimate the model parameters for which we derive closed formulas. We also perform simulation experiments, in order to numerically evaluate our method, study the accuracy of the estimators and compare it with the MNL. Last, we fit our model in the Hotel Chain dataset in Bodea et al., and we compare it with MNL in terms of efficiency, accuracy and robustness. We conclude that for rich enough datasets the model that includes interaction effects performs better in terms of how well it fits the data.