Ribeiro, Ricardo (2010): Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies.
Download (369kB) | Preview
The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety-seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi-low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward-looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable.
|Item Type:||MPRA Paper|
|Original Title:||Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies|
|Keywords:||Variety seeking; Intertemporal effects of consumption; product switching; Pricing; Dynamic demand;|
|Subjects:||D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade; e-Commerce
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C61 - Optimization Techniques; Programming Models; Dynamic Analysis
|Depositing User:||Ricardo Ribeiro|
|Date Deposited:||11. Oct 2010 19:02|
|Last Modified:||13. Feb 2013 16:12|
Aguirregabiria, V., 2002, "Sales promotions in supermarkets: Estimating their e¤ects on pro�ts and consumer welfare." Mimeo.
Anand, B. N. and R. Shachar, 2004, "Advertising, the matchmaker." Mimeo.
Benitez-Silva, H., G. Hall, G. J. Hitsch, G. Pauletto, and J. Rust, 2000, "A comparison of discrete and parametric approximation methods for solving dynamic programming problems in economics." Mimeo.
Blattberg, R. C., G. D. Eppen, and J. Lieberman, 1981, "A theoretical and empirical evaluation of price deals for consumer nondurables." Journal of Marketing, 45, 116-129.
Chamberlain, 1985, "Heterogeneity, omitted variable bias, and duration dependence." In J. J.
Heckman and B. Singer (Eds.), Longitudinal analysis of labor market data (pp. 3-38). No 10 in Econometric Society Monographs series, Cambridge, New York and sidney: Cambridge University Press.
Chintagunta, P. K., D. C. Jain, and N. J. Vilcassim, 1991, "Investigation heterogeneity in brand preferences in logit models for panel data." Journal of Marketing Research, 28, 417-428.
Conslik, J., E. Gerstner and J. Sobel, 1984, "Cyclic pricing by a durable goods monopolist." Quarterly Journal of Economics, 99, 489-505.
Davis, P., 2006, "The discrete choice analytically �exible (DCAF) model of demand for di¤erentiated products." Mimeo.
Dube, J. H., G. J. Hitsch and P. E. Rossi, 2006, "Do switching costs make markets less competitive?" Mimeo.
Erdem, T., S. Imai and M. P. Keane, 2003, "Brand and quantity choice dynamics under price uncertainty." Quantitative Marketing and Economics, 1(1), 5-64.
Faison , E. W. J., 1977, "The neglected variety drive." Journal of Consumer Research, 4, 172-175.
Goldfarb, A., 2006, "State dependence at internet portals". Journal of Economics & Management Strategy, 15(2), 317-352. Gonul, F. and K. Srinivasan, 1993, "Modeling unobserved heterogeneity in multinomial to logit models: methodological and managerial implications," Marketing Science, 12, 213-229.
Gorman , 1971, "Two stage budgeting." Mimeo.
Gourville, J. T. and D. Soman, 1998, "Payment depreciation: the behavioral e¤ects of temporally separating payments from consumption." Journal of Consumer Research, 25(2), 160-174.
Hartmann, W. R. and V. B. Viard, 2008, "Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program." Quantitative Marketing and Economics, 6, 109-137.
Hartmann, W. R., 2006, "Intertemporal e¤ects of consumption and their implications for demand elasticity estimates." Quantitative Marketing and Economics, 4, 325-349.
Heckman, J., 1981, "Heterogeneity and state dependence." In S. Rosen (Ed.), Studies in labor markets (pp. 91-139). Chicago: University of Chicago Press.
Hendel, I. and A. Nevo, 2006, "Measuring the implications of sales and consumer inventory behavior." Econometrica, 74(6), 1637-1673.
Hendel, I. and A. Nevo, 2006, "Sales and consumer inventory."RAND Journal of Economics, 37(3), 543-561.
Hoch, S. J., X. Dreze and M. E. Purk, 1994, "EDLP, hi-low, and margin arithmetic." The Journal of Marketing, 58(4), 16-27. Information Resources, Inc., 1993, Managing your Business in an EDLP Environment. Chicago: IRI.
Jain, D. C., N. J. Vilcassim and P. K. Chintagunta, 1994, "A random-coe¢ cients logit brand-choice model applied to panel data." Journal of Business and Economic Statistics, 12, 317� 328.
Jeuland, A. P. and C. Narasimhan, 1985, "Dealing - temporary price cuts - by seller as a buyer discrimination mechanism." Journal of Business, 58(3), 295-308.
Jeuland, A. P., 1978, "Brand preference over time: a partially deterministic operationalization of the notion of variety seeking." In S. Jain (Ed.), Research frontiers in marketing: dialogues and directions. No 42, AMA 1978 Educator's Proceedings, Chicago: American Marketing Association.
Kahn, B. E., 1995, "Consumer variety seeking among goods and services: an integrative review," Journal of Retailing and Consumer Services, 2(3), 139-148.
Kamakura, W. A. and G. J. Russell, 1989, "A Probabilistic Choice Model for Market Segmentation and Elasticity Structure," Journal of Marketing Research, 26, 379-390.
Keane, 1997, "Modelling heterogeneity and state dependence in consumer choice behavior." Journal of Business and Economic Statistics, 15(3). 310-327.
Klemperer, P., 1995, "Competition when consumers have switching costs: an overview with applications to industrial organization, macroeconomics, and international trade." Review of Economic Studies, 62, 515-539.
Lal, R. and R. Rao, 1997, "Supermarket competition: the case of every day low pricing." Marketing Science, 16(1), 60-80.
McAlister, L., 1982, "A dynamic attribute satiation model of variety seeking behavior." Journal of Consumer Research, 9, 141-150.
McAlister, L. and E. Pessemier, 1982, "Variety-seeking behaviour: an interdisciplinary review." The Journal of Consumer Research, 9(3), 311-322.
McFadden, 1989, "A method of simulated moments for estimation of discrete response models without numerical integration". Econometrica, 57: 995-1026.
McFadden, 1981, "Econometric models of probabilistic choice". In C. Manski and D. McFadden (Eds.), Structural Analysis of Discrete Data (pp, 198-272). MA: MIT Press.
Menon, S. and B. E. Kahn, 1995, "The impact of context on variety seeking in product choices." Journal of Consumer Research, 22, 285-295.
Narasimhan, C., 1988, "Competitive promotional strategies." Journal of Business, 61(4), 427-429.
Osborne, M., 2007, "Consumer learning, switching costs, and heterogeneity: a structural examination." Mimeo.
Pakes, A., 1986, "Patents as options: some estimates of the value of holding European patent stocks". Econometrica, 54, 755-784.
Pakes, A. and D. Pollard, 1989, "Simulation and the asymptotics of optimization estimators". Econometrica, 57, 1027-1057.
Pesendorfer, M., 2002, "Retail sales: a study of pricing behavior in supermarkets". Journal of Business, 75(1). 33-66.
Pessemier, E. A., 1985, "Varied individual behavior: some theories, measurement methods and models." Multivariate Behavioral Research, 20, 69-94.
Pigou, A. C., 1920, The Economics of Welfare. London: MacMillan.
Pollack, R., 1970, "Habit formation and dynamic demand functions." Journal of Political Economy, 78(4), 745-763.
Pozzi, A., 2009, "Shopping cost and brand exploration in online grocery." Mimeo.
Prelec, D. and G. Loewenstein, 1997, "Beyond Time Discounting." Marketing Letters, 8, 97-108.
Puterman, M. L. and M. C. Shin, 1978, "Modi�ed policy iteration algorithms for discounted Markov decision problems." Management Science, 24, 1127-1137.
Rust, J., 1987, "Optimal replacement of GMC bus engines: an empirical model of Harold Zurcher". Econometrica, 55(5). 999-1033.
Seetharaman, P. B. and H. Che, 2009, "Price competition in markets with consumer variety seeking." Marketing Science, 28(3), 516-525.
Shum, M., 2004, "Does advertising overcome brand loyalty? Evidence from the breakfast-cereals market." Journal of Economics and Management Strategy, 13, 91-109.
Simonson, I. and R. S.Winer, 1992, "The influence of purchase quantity and display format on consumer preference for variety." The Journal of Consumer Research, 19(1), 133-138.
Sobel, J., 1984, "The timing of sales." Review of Economic Studies, 53(3), 353-368.
Spinnewyn, F., 1981, "Rational habit formation." European Economic Review, 15, 91-109.
Varian, H., 1980, "A model of sales." American Economic Review, 70(4), 651-659.
Venkatesan, M., 1973, "Cognitive consistency and novelty seeking." In S. Ward and T. S. Robertson (Eds.), Consumer Behavior: Theoretical Sources, Englewood Cli¤s, NJ: Prentice Hall, 355-384.
Wertenbroch, K., 2001, "Self-rationing: self-control in consumer choice." Mimeo.