Consumer learning, switching costs, and heterogeneity: A structural examination |
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Authors: | Matthew Osborne |
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Institution: | (1) Bureau of Economic Analysis, US Department of Commerce, Washington, DC 20230, USA |
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Abstract: | This paper develops and estimates a model of forward-looking consumer learning with switching costs using household level
scanner data from a frequently purchased product category. This is novel because current models of consumer purchase behavior
assume that only one of these types of dynamics is present, not both at the same time. My model estimates support the presence
of both learning and switching costs in this product category. The estimates show that before consuming new products, consumers
are unsure of their tastes for them, and subsequently learn their tastes by purchase and consumption of new products. Switching
costs are large, comprising roughly 30 percent of the cost of a medium sized package of the product. Additionally, the model
incorporates very rich individual level unobserved heterogeneity in price sensitivities, tastes, and switching costs, and
the amount by which consumers learn. To show that my model produces different implications than a model with learning or switching
costs only, I estimate two more specifications, one without each type of dynamics, and simulate counterfactuals that are of
interest to managers and policymakers. I find that intertemporal elasticities are underestimated when either type of dynamics
is left out, by as much as 90%. Informative advertising is also affected by the presence of switching costs, although the
direction of the bias is not signed. Leaving out dynamics also has a large impact on long-term elasticities, which are used
by antitrust policymakers to evaluate the impact of mergers. When learning is ignored, cross elasticities are underestimated
by as much as 45%. When switching costs are ignored, both own and cross elasticities are underestimated. |
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