Criteria for Market Segmentation Studies

Morrison recently claimed that models which attempt to explain differences in purchasing behavior in terms of the characteristics of individual purchasers should be expected to have low R²'s. Here we generalize his stochastic model and also examine a slightly different stochastic model which is consistent with the usual regression segmentation studies. Correctly specified segmentation studies are shown to have higher R²'s (roughly exceeding 0.5) than typically reported, indicating many previous segmentation studies are misspecified. We also show how to estimate the correlation between prediction and long run average behavior from short term observations.