Essays on Dynamic Consumers' Brand Choice
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This dissertation is a collection of essays on consumer's state dependent choice. In many consumers packaged goods markets, consumer's brand choice is highly persistent because of state dependence where past choice directly influence present choice. Chapter I investigates why consumer choices show state dependence by testing two competing theories: learning and switching costs. To test them, I used a Nielsen consumer panel data set including a long history of repeated purchases by 28,724 households from 2006-2015. Reduced form estimates suggest that the results align with learning, but not switching costs. I also find the only the first and second brand experiences affect present choice. In Chapter II, consistent with reduced-form analysis, I hypothesize that under learning behavior, if consumers try a new brand, consumers are likely to choose a smaller size than before because of uncertainty on product information, if not, consumers are likely to choose a bigger size than before because of lower price per unit with a bigger size. However, under switching cost behavior, consumers size choice will not be affected by brand switching decision. To test this causal relationship between brand switching decision and size choice, I adopt double machine learning method. Compared to previous reduced-form analysis, double machine learning model specifies a set of control variables without human judgement and it provides a causal parameter. Also, compared to naive or prediction based machine learning models, it overcomes the regularization bias by using Neyman orthogonality and over-fitting problems by using sample splitting method. As a result, I find that consumer's new trial on a brand leads to choose a smaller size choice than before where it supports learning behavior, not switching costs behavior. These reduced form studies of Chapter I and II motivate structural approaches to empirical modeling. Chapter III tests the two competing theories with a structural demand model that incorporated variety-seeking behavior. Previous studies failed to explain how states affect two decisions: not only persistent brand choice, but also brand switching that usually variety-seeker have shown. To incorporate these decisions, I develop a dynamic panel demand model with multiple discreteness choices for estimating preferences where some consumers switch brand frequently even most consumers show persistent brand choice. I first find that consumers learn fast, which disputes previous slowdown learning models such as Bayesian learning. Second, state dependence of consumer choice diminishes with time elapsed from each purchase. These findings are robust to controlling variety seeking behavior or not. Combining Chapter I, II, and III, I conclude that with the assumption on myopic consumers, because of learning behavior, consumers show persistent brand choice in the initial shopping period, but as they exposure to the same brands again and again, they become satiated the brand. In other words, consumers show diminishing marginal utility over quantity consumed. Therefore, consumers switch a brand.
- Economics