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The Informative Role of Advertising and Experience in Dynamic Brand Choice: An Application to the Ready-to-Eat Cereal Market

  • Yan Chen
  • Ginger Zhe JinEmail author
Chapter

Abstract

We study how consumers make brand choices when they have limited information. In a market of experience goods with frequent product entry and exit, consumers face two types of information problems: first, they have limited information about a product’s existence; second, even if they know a product exists, they do not have full information about its quality until they purchase and consume it. In this chapter, we incorporate purchase experience and brand advertising as two sources of information and examine how consumers use them in a dynamic process. The model is estimated using the Nielsen Homescan data in Los Angeles, which consist of grocery shopping history for 1,402 households over 6 years. Taking ready-to-eat cereal as an example, we find that consumers learn about new products quickly and form strong habits. More specifically, advertising has a significant effect in informing consumers of a product’s existence and signaling product quality. However, advertising’s prestige effect is not significant. We also find that incorporating limited information about a product’s existence leads to larger estimates of the price elasticity. Based on the structural estimates, we simulate consumer choices under three counterfactual experiments to evaluate brand marketing strategies and a policy on banning children-oriented cereal advertising. Simulation suggests that the advertising ban encourages consumers to consume less sugar and more fiber, but their expenditures are also higher because they switch to family and adult brands, which are more expensive.

Keywords

Consumer choice Experience goods Informative and prestige advertising Ready-to-eat cereal market Child-oriented advertising Childhood obesity 

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Copyright information

© Springer Science+Business Media Dordrecht 2012

Authors and Affiliations

  1. 1.Bates WhiteWashingtonUSA
  2. 2.Department of EconomicsUniversity of MarylandCollege ParkUSA
  3. 3.National Bureau of Economic ResearchCambridgeUSA

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