Consumers' Costly Responses to Product Harm Crises

53 Pages Posted: 9 May 2016 Last revised: 28 Jan 2019

See all articles by Rosa Ferrer

Rosa Ferrer

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Helena Perrone

Universitat Pompeu Fabra

Date Written: May 2016

Abstract

Exploiting a major food safety crisis, we estimate a full demand model for the unsafe product and its substitutes and recover consumers' preference parameters. Counterfactual exercises quantify the relevance of different mechanisms -changes in safety perceptions, idiosyncratic tastes, product characteristics, and prices- driving consumers' responses.

We find that consumers' reaction is limited by their preferences for the product observable and unobservable characteristics. Due to the costs associated with switching from the affected product, the decline in demand following a product-harm crisis tends to understate the true weight of such events in consumers' utility. We find that, in the specific crisis we study, the demand would have declined 19% further if consumers had had access to a closer substitute in terms of product characteristics and 23% further if consumers' idiosyncratic unobserved taste for the affected product category was as low as that for one of the main substitute categories.

For an accurate assessment of product-harm crises, managerial strategies should therefore account for how different demand drivers bind consumers' substitution patterns.

Keywords: Demand estimation, idiosyncratic utility parameters, Product safety, scanner data

JEL Classification: K13, L66

Suggested Citation

Ferrer, Rosa and Perrone, Helena, Consumers' Costly Responses to Product Harm Crises (May 2016). CEPR Discussion Paper No. DP11262, Available at SSRN: https://ssrn.com/abstract=2777569

Rosa Ferrer (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Helena Perrone

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

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