State Dependence and Alternative Explanations for Consumer Inertia
For many consumer packaged goods products, researchers have documented a form of state dependence whereby consumers become "loyal" to products they have consumed in the past. That is, consumers behave as though there is a utility premium from continuing to purchase the same product as they have purchased in the past or, equivalently, there is a psychological cost to switching products. However, it has not been established that this form of state dependence can be identified in the presence of consumer heterogeneity of an unknown form. Most importantly, before this inertia can be given a structural interpretation and used in policy experiments such as counterfactual pricing exercises,alternative explanations which might give rise to similar consumer behavior must be ruled out. We develop a flexible model of heterogeneity which can be given a semi-parametric interpretation and rule out alternative explanations for positive state dependence such as autocorrelated choice errors, consumer search, or consumer learning.
We thank Wes Hutchinson, Ariel Pakes, and Peter Reiss for comments and suggestions. We acknowledge the Kilts Center for Marketing at the Booth School of Business, University of Chicago for providing research funds. The first author was also supported by the Neubauer Family Faculty Fund, and the second author was also supported by the Beatrice Foods Co. Faculty Research Fund at the Booth School of Business. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Jean-Pierre DubÃ© & GÃ¼nter J. Hitsch & Peter E. Rossi, 2010. "State dependence and alternative explanations for consumer inertia," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 417-445. citation courtesy of