The Informational Content of Consumer Choice in Differentiated Product Markets

• Applicant: Dr. André Romahn, Ph.D.
• Subject Area: Economic Policy, Applied Economics ; Statistics and Econometrics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 462020252

Consumers often make decisions without being fully informed. We aim to structurally estimate the extent to which different consumers take into account the available choices in differentiated products markets. To obtain credible estimates of limited information of consumers, our modelling approach is going to allow consumers to differ in the extent to which available options are considered and, in their willingness, to pay for product characteristics. Joint identification of preference and consideration set heterogeneity will be based on observed asymmetries in the substitution between different products. Structural demand models with a full information assumption imply symmetric diversion of demand between different products. Deviations from this symmetry indicate that not all consumers are fully informed. Such observed asymmetries therefore allow us to identify parameters that determine the probability that specific products are considered. The approach avoids imposing an exclusion restriction as for example assuming that marketing expenditure only shifts consumer attention but not consumer utility. This also allows price and other product characteristics to determine consumer attention and thereby yields a substantially more flexible demand model. Our aim is to apply this modelling approach to a large number of categories from the U.S. consumer packaged goods industry, as covered in the Kilts-Nielsen data at Chicago Booth. The data offers both scanner, consumer panel and marketing exposure data. Obtaining estimates of consumers’ consideration technology will allow us to quantify if firms have been able to raise their profitability over the last decade by steering consumers to their products through shifting consumer attention. This can shed some light on the potential drivers for systematic markup changes in the U.S. economy. It can also provide important insights on the effect of horizontal mergers in differentiated product markets, where typically full information is assumed. If and how merged firms adjust their efforts of gaining consumer attention post-merger is to the best of our knowledge an under investigated question with potentially important implications for competition policy.

• DFG Programme: Research Units
• Subproject of: FOR 5392: Consumer Preferences, Consumer Mistakes, and Firms' Response
• International Connection: Austria
• Cooperation Partner: Professorin Dr. Christine Zulehner