Learned Complementarity

Abstract

Product substitution patterns are often treated as static concepts in the analysis of consumer purchase behavior. In this paper, we study the do-it-yourself (DIY) home improvement market where within-consumer dynamics in product complementarity can exist due to changes in the complexity of projects and consumer skill over time. Using data on lumber purchases from a Fortune 500 specialty goods retailer, we first document that the likelihood of co-purchase tends to increase with category experience. We then develop and estimate a model of "learned complementarity" whereby consumers sequentially realize super-additive utility from co-consumption over time. Our estimates reveal significant heterogeneity in substitution patterns both within and across households, and that the economic value of moving one step on the path of learned complementarity is roughly $1 (or 5% of the average purchase price in our data). Lastly, we show how our model can be used to segment customers at different stages of the learning process and how such segments can support targeted marketing efforts.

Keywords: learning-by-doing, demand for bundles

JEL Classification: C11, D83, M31