Non-parametric Estimation of Habitual Brand Loyalty

Abstract

Testing for and measuring habitual brand loyalty (HBL) is one of the classic questions in quantitative marketing. We propose a nonparametric test for HBL using a ``dynamic potential outcomes'' model that resolves the classic identification challenge of decoupling state dependence and unobserved heterogeneity. We then propose a semi-parametric test for forward-looking behavior to assess whether consumers rationally plan their HBL. Case studies of several large consumer packaged goods categories reveal a non-trivial extent of HBL in consumers’ brand choices. Semi-parametric evidence for forward-looking consumer behavior strongly rejects the myopic discrete-choice model in favor of the dynamic discrete-choice model with a freely-varying discount factor. However, consumers are found to be considerably more impatient than would be implied by the real rate of interest. Nevertheless, the long-run price elasticities from a dynamic discrete-choice model are found to be larger in magnitude than those from a model with myopic choices.

Keywords: brand loyalty, state dependence, demand estimation, discount factor, dynamic

JEL Classification: D11, D12, L66, M3