Consumer Risk-reduction Behavior and New Product Purchases
Posted: 18 Jan 2017
Date Written: January 12, 2017
Consumers purchase lower quantities of new products compared to those they have purchased in the past. We explain this observation as a result of risk-averting behavior by utility-maximizing consumers. If a new product involves a higher degree of risk that quality expectations will not be met compared to an incumbent product, we show that utility will be more concave for the new product. We test this prediction using a multiple-discrete / continuous extreme value (MDCEV) model of demand. We show that utility is indeed more concave for new products relative to previously-purchased products.
Keywords: differentiated products, expected utility, multiple discrete, new products, risk
JEL Classification: C25, D81, L13, L66, M31
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