State Dependence and Alternative Explanations for Consumer Inertia

Abstract:     
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. Using data on margarine and refrigerated orange juice purchases, we show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks. Thus, the inertia is at least partly due to structural, not spurious state dependence. 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. Properly distinguishing among the different sources of inertia 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.

Number of Pages in PDF File: 54

Keywords: state dependence, heterogeneity, search, learning

working papers series