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State dependence and alternative explanations for consumer inertia

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  • Jean-Pierre Dubé
  • Günter J. Hitsch
  • Peter E. Rossi

Abstract

For many consumer packaged goods products, researchers have documented inertia in brand choice, a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past. We show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks. We explore three economic explanations for the observed structural state dependence: preference changes due to past purchases or consumption experiences which induce a form of loyalty, search, and learning. Our data are consistent with loyalty, but not with search or learning. This distinction is important for policy analysis, because the alternative sources of inertia imply qualitative differences in firm's pricing incentives and lead to quantitatively different equilibrium pricing outcomes. Copyright (c) 2010, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 41 (2010)
Issue (Month): 3 ()
Pages: 417-445

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Handle: RePEc:bla:randje:v:41:y:2010:i:3:p:417-445

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References

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  1. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers.
  2. Allenby, Greg M. & Rossi, Peter E., 1998. "Marketing models of consumer heterogeneity," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 57-78, November.
  3. P. B. Seetharaman, 2004. "Modeling Multiple Sources of State Dependence in Random Utility Models: A Distributed Lag Approach," Marketing Science, INFORMS, vol. 23(2), pages 263-271, April.
  4. Hoyer, Wayne D, 1984. " An Examination of Consumer Decision Making for a Common Repeat Purchase Product," Journal of Consumer Research, University of Chicago Press, vol. 11(3), pages 822-29, December.
  5. Keane, Michael P, 1997. "Modeling Heterogeneity and State Dependence in Consumer Choice Behavior," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 310-27, July.
  6. Tülin Erdem & Susumu Imai & Michael Keane, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," Quantitative Marketing and Economics, Springer, vol. 1(1), pages 5-64, March.
  7. Nitin Mehta & Surendra Rajiv & Kannan Srinivasan, 2003. "Price Uncertainty and Consumer Search: A Structural Model of Consideration Set Formation," Marketing Science, INFORMS, vol. 22(1), pages 58-84, June.
  8. Daniel A. Ackerberg, 2003. "Advertising, learning, and consumer choice in experience good markets: an empirical examination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1007-1040, 08.
  9. Nickolay V. Moshkin & Ron Shachar, 2002. "The Asymmetric Information Model of State Dependence," Marketing Science, INFORMS, vol. 21(4), pages 435-454, August.
  10. Erdem, Tulin & Sun, Baohong, 2001. "Testing for Choice Dynamics in Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 142-52, April.
  11. Peter E. Rossi & Robert E. McCulloch & Greg M. Allenby, 1996. "The Value of Purchase History Data in Target Marketing," Marketing Science, INFORMS, vol. 15(4), pages 321-340.
  12. Jean-Pierre Dubé & Günter J. Hitsch & Peter E. Rossi & Maria Ana Vitorino, 2008. "Category Pricing with State-Dependent Utility," Marketing Science, INFORMS, vol. 27(3), pages 417-429, 05-06.
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Citations

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Cited by:
  1. Cohen, Michael, 2010. "A Structured Covariance Probit Demand Model," Research Reports 149970, University of Connecticut, Food Marketing Policy Center.
  2. Xiaojing Dong & Pradeep Chintagunta & Puneet Manchanda, 2011. "A new multivariate count data model to study multi-category physician prescription behavior," Quantitative Marketing and Economics, Springer, vol. 9(3), pages 301-337, September.
  3. Gábor Kézdi & Gergely Csorba, 2013. "Estimating Consumer Lock-In Effects from Firm-Level Data," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 431-452, September.
  4. Granlund, David, 2012. "The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals," HUI Working Papers 75, HUI Research.
  5. Rhodes, Andrew, 2013. "Re-examining the Effects of Switching Costs," MPRA Paper 45982, University Library of Munich, Germany.
  6. K. Sudhir & Nathan Yang, 2014. "Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity," Cowles Foundation Discussion Papers 1941, Cowles Foundation for Research in Economics, Yale University.
  7. Enghin Atalay, 2014. "Materials Prices And Productivity," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 575-611, 06.
  8. Adamowicz, Wiktor L. & Swait, Joffre, 2010. "Integrating Routine, Variety Seeking and Compensatory Choice in a Utility Maximizing Framework," Staff Paper Series 98687, University of Alberta, Department of Resource Economics and Environmental Sociology.
  9. Gábor Kézdi & Gergely Csorba, 2012. "Estimating consumer lock-in effects from firm-level data," CEU Working Papers 2012_17, Department of Economics, Central European University, revised 19 Oct 2012.
  10. Wilson, Chris M., 2012. "Market frictions: A unified model of search costs and switching costs," European Economic Review, Elsevier, vol. 56(6), pages 1070-1086.
  11. Michael P. Keane, 2013. "Panel data discrete choice models of consumer demand," Economics Papers 2013-W08, Economics Group, Nuffield College, University of Oxford.
  12. Bart J. Bronnenberg & Jean-Pierre H. Dube & Matthew Gentzkow, 2012. "The Evolution of Brand Preferences: Evidence from Consumer Migration," American Economic Review, American Economic Association, vol. 102(6), pages 2472-2508, October.
  13. Andrew T. Ching & Tülin Erdem & Michael P. Keane, 2013. "Learning Models: An Assessment of Progress, Challenges and New Developments," Economics Papers 2013-W07, Economics Group, Nuffield College, University of Oxford.
  14. Hong, Seung-Hyun & Rezende, Leonardo, 2012. "Lock-in and unobserved preferences in server operating systems: A case of Linux vs. Windows," Journal of Econometrics, Elsevier, vol. 167(2), pages 494-503.

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