State Dependence and Alternative Explanations for Consumer Inertia
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Günter J. Hitsch
University of Chicago - Booth School of Business
Peter E. Rossi
University of California, Los Angeles (UCLA) - Anderson School of Management
NBER Working Paper No. w14912
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.
Number of Pages in PDF File: 48
Date posted: April 29, 2009
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