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linear coding in HB


I'm re-scaling my conditional prices for the values I will assign on the linear coding for HB. I remembered doing this yesterday because I saw a query on it and I followed the formula but now can't find the query again to confirm. The values I got are -1 0 +1. Am I right in deriving this if my prices for set1: price1-1560 price2-2625 price3-3690. same with set 2: price1-1790 price2-3015 price3-4240 and so on..I set proportionate price levels.

Thanks in advance!
asked Mar 1, 2012 by anonymous

1 Answer

+1 vote
Because your three price levels for your conditional pricing table are: -40%, average price, and +40% you could do a fine job capturing it as -1 0 and +1 for the three values to be associated (within the estimation design matrix) with those three levels.  Or, -2, 0, +2, etc.

You could also use 0.6, 1.0, and 1.4.  Any of these ways, you're dealing with values in the single digits (best for convergence in CBC/HB) and also that the middle price is equidistant from the ends (because that's the pattern you put in your conditional pricing table).

If you are going to be building your own simulator, just make sure you remember that CBC/HB automatically zero-centers whatever values you use during estimation.  So, the low price will be associated with a negative "price value" times the utility coefficient.

If you are using our SMRT or Online Market Simulators, if you select the option within those systems to look at your conditional pricing table, then you can just type the original prices in the simulation specifications (e.g. 3690), and the software will map that value to the appropriate value index per the conditional pricing table.  This makes it easy to use the simulator in the end, because of that mapping, and allows you to specify products on the original price scale.
answered Mar 1, 2012 by Bryan Orme Platinum Sawtooth Software, Inc. (142,815 points)
Thanks Bryan, for the response and additional note.