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what is UH? June 8, 2007

Posted by jyu in Qualifying.
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Households with the same demographic and socioeconomic characteristics (income, family size, etc.) when contronted with a given set of covariates (e.g. price, feature advertisements, in-store displays) may exhibit different choice behavior due to differences in :

1. Overall brand preference (intercept or preference heterogeneity), and

2. Variations in their responses to the covariates (slope or response heterogeneity).

Both of these sources of variation across households are referred to as an unobserved heterogeneity (UH) because they capture the effects of unobserved factors that influence household purchase behavior.

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