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Learning About Computers: An Analysis of Information Search and Technology Choice

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Author Info

  • Tülin Erdem

    ()

  • Michael Keane

    ()

  • T. Öncü

    ()

  • Judi Strebel

    ()

Abstract

We estimate a dynamic model of how consumers learn about and choose between different brands of personal computers (PCs). To estimate the model, we use a panel data set that contains the search and purchase behavior of a set of consumers who were in the market for a PC. The data includes the information sources visited each period, search durations, as well as measures of price expectations and stated attitudes toward the alternatives during the search process. Our model extends recent work on estimation of Bayesian learning models of consumer choice behavior in environments characterized by uncertainty by estimating a model of active learning—i.e., a model in which consumers make optimal sequential decisions about how much information to gather prior to making a purchase. Also, following the suggestion of Manski (2003), we use our data on price expectations to model consumers’ price expectation process, and, following the suggestion of McFadden (1989a), we incorporate the stated brand quality information into our likelihood function, rather than modeling only revealed preference data. Our analysis sheds light on how consumer forward-looking price expectations and the process of learning about quality influence the consumer choice process. A key finding is that estimates of dynamic price elasticities of demand exceed estimates that ignore the expectations effect by roughly 50%. This occurs because our estimated expectations formation process implies that consumers expect mean reversion in price changes. This enhances the impact of a temporary price cut. Finally, while our work focuses specifically on the PC market, the modeling approach we develop here may be useful for studying a wide range of high-tech, high-involvement durable goods markets where active learning is important. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11129-005-0269-7
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Bibliographic Info

Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 3 (2005)
Issue (Month): 3 (September)
Pages: 207-247

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Handle: RePEc:kap:qmktec:v:3:y:2005:i:3:p:207-247

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Web page: http://www.springerlink.com/link.asp?id=111240

Related research

Keywords: brand choice models; technology choice; decision-making under uncertainty; information search; consumer expectations; dynamic programming;

References

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  1. Beatty, Sharon E & Smith, Scott M, 1987. " External Search Effort: An Investigation across Several Product Categories," Journal of Consumer Research, University of Chicago Press, vol. 14(1), pages 83-95, June.
  2. Lance Lochner, 2005. "Individual Perceptions of the Criminal Justice System," 2005 Meeting Papers 452, Society for Economic Dynamics.
  3. Ching, Andrew, 2008. "Consumer Learning and Heterogeneity: Dynamics of Demand for Prescription Drugs after Patent Expiration," MPRA Paper 7265, University Library of Munich, Germany.
  4. Eileen Bridges & Chi Kin (Bennett) Yim & Richard A. Briesch, 1995. "A High-Tech Product Market Share Model with Customer Expectations," Marketing Science, INFORMS, vol. 14(1), pages 61-81.
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  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. Keane, Michael, 1993. "Simulation estimation for panel data models with limited dependent variables," MPRA Paper 53029, University Library of Munich, Germany.
  8. Füsun Gönül & Kannan Srinivasan, 1996. "Estimating the Impact of Consumer Expectations of Coupons on Purchase Behavior: A Dynamic Structural Model," Marketing Science, INFORMS, vol. 15(3), pages 262-279.
  9. Gregory S. Crawford & Matthew Shum, 2005. "Uncertainty and Learning in Pharmaceutical Demand," Econometrica, Econometric Society, vol. 73(4), pages 1137-1173, 07.
  10. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
  11. Harris, Katherine M. & Keane, Michael P., 1998. "A model of health plan choice:: Inferring preferences and perceptions from a combination of revealed preference and attitudinal data," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 131-157, November.
  12. Srinivasan, Narasimhan & Ratchford, Brian T, 1991. " An Empirical Test of a Model of External Search for Automobiles," Journal of Consumer Research, University of Chicago Press, vol. 18(2), pages 233-42, September.
  13. Moorthy, Sridhar & Ratchford, Brian T & Talukdar, Debabrata, 1997. " Consumer Information Search Revisited: Theory and Empirical Analysis," Journal of Consumer Research, University of Chicago Press, vol. 23(4), pages 263-77, March.
  14. Giuseppe Moscarini & Lones Smith, 2001. "The Optimal Level of Experimentation," Econometrica, Econometric Society, vol. 69(6), pages 1629-1644, November.
  15. Bridges, Eileen & Coughlan, Anne T. & Kalish, Shlomo, 1991. "New technology adoption in an innovative marketplace: Micro- and macro-level decision making models," International Journal of Forecasting, Elsevier, vol. 7(3), pages 257-270, November.
  16. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
  17. El-Gamal, Mahmoud A. & Grether, David M., 1995. "Are People Bayesian? Uncovering Behavioral Strategies," Working Papers 919, California Institute of Technology, Division of the Humanities and Social Sciences.
  18. Brucks, Merrie, 1985. " The Effects of Product Class Knowledge on Information Search Behavior," Journal of Consumer Research, University of Chicago Press, vol. 12(1), pages 1-16, June.
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Citations

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Cited by:
  1. Marcoul, Philippe & Weninger, Quinn, 2008. "Search and Active Learning with Correlated Information: Empirical Evidence from Mid-Atlantic Clam Fishermen," Staff General Research Papers 11601, Iowa State University, Department of Economics.
  2. Marc Rysman & Gautam Gowrisankaran, 2011. "Dynamics of Consumer Demand for New Durable Goods," Boston University - Department of Economics - Working Papers Series WP2011-062, Boston University - Department of Economics.
  3. 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.
  4. Weifang Lou & David Prentice & Xiangkang Yin, 2008. "The Effects of Product Ageing on Demand: The Case of Digital Cameras," Working Papers 2008.06, School of Economics, La Trobe University.
  5. Nair, Harikesh, S., 2006. "Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Games," Research Papers 1947, Stanford University, Graduate School of Business.
  6. Adeline Delavande & Hans-Peter Kohler, 2009. "Subjective expectations in the context of HIV/AIDS in Malawi," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 20(31), pages 817-875, June.
  7. Chorus, C.G. & Dellaert, B.G.C., 2010. "Travel Choice Inertia: The Joint Role of Risk Aversion and Learning," ERIM Report Series Research in Management ERS-2010-040-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  8. Tülin Erdem & Kannan Srinivasan & Wilfred Amaldoss & Patrick Bajari & Hai Che & Teck Ho & Wes Hutchinson & Michael Katz & Michael Keane & Robert Meyer & Peter Reiss, 2005. "Theory-Driven Choice Models," Marketing Letters, Springer, vol. 16(3), pages 225-237, December.
  9. Brian Blackburn & Aprajit Mahajan & Alessandro Tarozzi & Joanne Yoong, 2009. "Bednets, Information and Malaria in Orissa," Discussion Papers 08-025, Stanford Institute for Economic Policy Research.
  10. Pamela Giustinelli, 2011. "Group Decision Making with Uncertain Outcomes: Unpacking Child-Parent Choices of High School Tracks," Working Papers 2011-030, Human Capital and Economic Opportunity Working Group.
  11. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  12. Oded Netzer & Olivier Toubia & Eric Bradlow & Ely Dahan & Theodoros Evgeniou & Fred Feinberg & Eleanor Feit & Sam Hui & Joseph Johnson & John Liechty & James Orlin & Vithala Rao, 2008. "Beyond conjoint analysis: Advances in preference measurement," Marketing Letters, Springer, vol. 19(3), pages 337-354, December.
  13. Matthew Osborne, 2011. "Consumer learning, switching costs, and heterogeneity: A structural examination," Quantitative Marketing and Economics, Springer, vol. 9(1), pages 25-70, March.
  14. Wesley Hartmann, 2006. "Intertemporal effects of consumption and their implications for demand elasticity estimates," Quantitative Marketing and Economics, Springer, vol. 4(4), pages 325-349, December.

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