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We define the concept of customer overlap of product j with product
k as the share of j’s customers who buy k. We argue that,
in appropriate contexts, customer overlaps are an excellent proxy
for diversion ratios, a useful and popular way to summarize competition
between sellers of substitute products. Unlike diversion
ratios, which are often challenging to estimate, customer overlaps
are straightforwardly observed in many datasets. We show theoretically,
and validate empirically, the close connection between
customer overlaps and diversion ratios. We illustrate the potential
use of customer overlap in contexts where estimation of diversion
ratios could be prohibitive.
