Consumer learning and evolution of consumer brand preferences

Abstract

We develop a structural dynamic demand model that examines how brand preferences evolve when consumers are uncertain about product quality and their needs change periodically. We allow for strategic sampling behavior of consumers under quality uncertainty and allow for strategic sampling to increase periodically as consumers' needs change periodically. We differ from previous work on forward-looking consumer Bayesian learning by allowing for 1) spill-over learning effects across different versions of products or products in different product categories that share a brand name and 2) duration-dependence in utility for a specific version of a product or product class to capture systematic periodic changes in consumer utility and migration of consumers across product versions or classes. We also assess the evolution of price elasticities in markets where there is consumer quality uncertainty that diminishes over time as consumers get more experienced. We estimate our model using scanner data for the disposable diapers category and discuss the consumer behavior and managerial implications of our estimation and policy simulation results.

The Economic Value of Online Reviews

“…This modeling framework was recently applied by Szymanowski and Gijsbrechts (2012) in the study of cross-learning in private labels. Che et al (2015) develop a different correlated learning model by allowing consumer experience of a particular brand size to provide quality signals for other brand sizes. By contrast to these applications, our model assumes that consumers learn from the correlation of evaluations with individual reviewers.…”

Dynamic Entry With Demand and Supply Side Spillovers

“…Rodrigue and Tan (), for instance, find that firms can increase their future sales through decreasing their current price and building their brand's reputation. Similarly, Erdem (), Che, Erdem, and Oncu (), and Ching and Lim () document the fact that consumers' “correlated learning” improves a firm's performance in a new product market if it has experience in a related product market . This improvement implies that a firm's decision to enter a product market is determined not only by the profits associated with this market, but also the enhanced profitability in future markets.…”

“…Erdem (), for example, finds that consumers are willing to purchase their oral hygiene products under the same brand. This loyalty allows a supplier with more product varieties to obtain more market power or share in a new market than competitors offering a smaller range of products (Che, Erdem, and Oncu ; Ching and Lim ; Hendricks and Sorensen ; Klemperer and Padilla ). In the pharmaceutical industry, demand side spillovers, which are usually referred to as the firm's reputation, also play a significant role (e.g., Gilbert, Ural, and Lopz ; Keyl ; Mason and Bearden ; Reiffen and Ward ; Scott‐Morton ).…”

“…This experience reduces the subsequent costs associated with the entry in future markets. The demand channel is usually caused by consumer learning (e.g., Che, Erdem, and Oncu ; Ching and Lim ; Erdem ; Hendricks and Sorensen ). In particular, when consumers' quality perceptions are correlated across different generic drugs under the same brand, the previous experience in one generic drug serves as a quality signal of other drugs belonging to the same brand.…”

Empirical Models of Learning Dynamics: A Survey of Recent Developments

“…Che et al (2015) use a forward-looking dynamic demand model to examine how brand preferences evolve when consumers are new to a market and their needs change over time.…”