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State Dependence and Alternative Explanations for Consumer Inertia

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

Abstract

For many consumer packaged goods products, researchers have documented a form of state dependence whereby consumers become "loyal" to products they have consumed in the past. That is, consumers behave as though there is a utility premium from continuing to purchase the same product as they have purchased in the past or, equivalently, there is a psychological cost to switching products. However, it has not been established that this form of state dependence can be identified in the presence of consumer heterogeneity of an unknown form. Most importantly, before this inertia can be given a structural interpretation and used in policy experiments such as counterfactual pricing exercises,alternative explanations which might give rise to similar consumer behavior must be ruled out. We develop a flexible model of heterogeneity which can be given a semi-parametric interpretation and rule out alternative explanations for positive state dependence such as autocorrelated choice errors, consumer search, or consumer learning.

Suggested Citation

  • Jean-Pierre Dubé & Günter J. Hitsch & Peter E. Rossi, 2009. "State Dependence and Alternative Explanations for Consumer Inertia," NBER Working Papers 14912, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14912
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L0 - Industrial Organization - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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