State Dependence and Preference Heterogeneity: The Hand of the Past on Breakfast Cereal Consumption

By explicitly accounting for observed and unobserved taste heterogeneity, we investigate state dependence in food consumption on household level. Positive state dependence, which can be interpreted as a loyalty measure, implies habit persistence, whereas negative state dependence implies variety-seeking behavior. Using ConsumerScan data for 2,717 households in Germany for a four-year period (2000 until 2003), we apply mixed multinomial (random coefficient) logit models to analyze consumption behavior in the breakfast cereal market. We find substantial heterogeneity between households: the majority of them express some degree of positive state dependence, which depreciates over time. Merely a small share of the households can be characterized as variety-seekers. The analysis sheds light on the correlation between price sensitivity and loyalty. More state dependent households seem to be more sensitive to price changes. By obtaining household-specific coefficients, we are able to define each household´s position on the distribution of the parameters. Comparing state dependence coefficients and two further loyalty measures (brand-runs and repurchase probabilities), we observe a positive correlation between these, which underpins the importance of the effect of prior consumption. As a diagnostic check, the unconditional distributions of the parameters and the average of the distributions conditional on previous choices are compared.