State Dependence and Alternative Explanations for Consumer Inertia

54 Pages Posted: 18 Mar 2009 Last revised: 14 Apr 2010

Jean-Pierre Dubé

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2010

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.

Keywords: state dependence, heterogeneity, search, learning

Suggested Citation

Dubé, Jean-Pierre and Hitsch, Günter J. and Rossi , Peter E., State Dependence and Alternative Explanations for Consumer Inertia (February 24, 2010). Chicago Booth School of Business Research Paper No. 09-14. Available at SSRN: https://ssrn.com/abstract=1361312 or http://dx.doi.org/10.2139/ssrn.1361312

Jean-Pierre H. Dube

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guenter J. Hitsch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Peter E. Rossi (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

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