Tenure Dependence in Consumer-Firm Relationships: An Empirical Analysis of Consumer Departures from Automobile Insurance Firms
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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Volume (Year): 36 (2005)
Issue (Month): 1 (Spring)
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