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State dependence and alternative explanations for consumer inertia

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

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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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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  1. 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.
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  7. Erdem, Tulin & Imai, Susumu & Keane, Michael, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," MPRA Paper 52516, University Library of Munich, Germany.
  8. 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.
  9. 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.
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  12. 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.
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