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Endogeneity

Part 2. Marketing Research

  1. Neeraj Arora

Published Online: 15 DEC 2010

DOI: 10.1002/9781444316568.wiem02064

Wiley International Encyclopedia of Marketing

Wiley International Encyclopedia of Marketing

How to Cite

Arora, N. 2010. Endogeneity. Wiley International Encyclopedia of Marketing. 2.

Author Information

  1. University of Wisconsin, Madison, WI, USA

Publication History

  1. Published Online: 15 DEC 2010

Abstract

Most regression applications in marketing assume that the independent variables are determined exogenously. This is rarely the case for field data. For example, promotion decisions (x) are often impacted by expected sales (y) – high potential markets likely get greater resources. Failure to recognize endogeneity in any regression model leads to biased parameter estimates and therefore requires careful attention. Endogeneity could be caused by omitted variables, measurement error, or simultaneity. To address endogeneity, a possible approach is to jointly model demand and marketing variables by recognizing that marketing decisions may be explicitly related to the expected demand or model parameters. Another approach is to include an objective function of the decision maker that incorporates model parameters in the demand equation. An increased recognition of the limitations of a reduced form model that ignores the underlying data-generating mechanism has led to greater efforts to use structural models that carefully account for endogeneity problems. Data fusion and experiments are also important avenues to account for endogeneity.

Keywords:

  • bias;
  • omitted variable;
  • simultaneity;
  • structural model;
  • instrumental variables