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Tenure Dependence in Consumer-Firm Relationships: An Empirical Analysis of Consumer Departures from Automobile Insurance Firms

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  • Mark Israel

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    (Northwestern University)

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    Abstract

    A typical pattern in markets featuring long-term consumer-firm relationships is for departure probabilities to decline with tenure. A crucial question is whether this actually implies increasing consumer preference for firms. If so, firms should actively try to convince consumers to remain through the early periods of the relationship and should enter new markets quickly. However, the pattern can also be explained by selection on unobserved heterogeneity. The challenge is to use the data available in these markets--generally details on the consumers of one firm--to distinguish between these explanations. I rely on individual price histories in auto insurance. Findings include an economically relevant level of both relationship effects and heterogeneity, but a much more important role for heterogeneity.

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    Bibliographic Info

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

    Volume (Year): 36 (2005)
    Issue (Month): 1 (Spring)
    Pages: 165-192

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    Handle: RePEc:rje:randje:v:36:y:2005:1:p:165-192

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    Related research

    Keywords: Consumer Economics: Empirical Analysis Insurance; Insurance Companies Marketing Automobile Insurance; Consumer; Insurance; Preference;

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    Cited by:
    1. Mark Israel, 2005. "Services as Experience Goods: An Empirical Examination of Consumer Learning in Automobile Insurance," American Economic Review, American Economic Association, vol. 95(5), pages 1444-1463, December.
    2. Alma Cohen, 2008. "Asymmetric Learning in Repeated Contracting: An Empirical Study," NBER Working Papers 13752, National Bureau of Economic Research, Inc.
    3. Jeffrey T. Prince & Shane Greenstein, 2011. "Does Service Bundling Reduce Churn?," Working Papers 2011-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. Yukako Ono & Victor Stango, 2005. "Supplier switching and outsourcing," Working Paper Series WP-05-22, Federal Reserve Bank of Chicago.
    5. 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.

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