Consumers’ Costly Responses to Product-Harm Crises

Rosa Ferrer () and Helena Perrone ()
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Rosa Ferrer: Department of Economics and Business, Universitat Pompeu Fabra, Barcelona 08005, Spain; Barcelona School of Economics, Barcelona 08005, Spain
Helena Perrone: Department of Economics, University of Mannheim, Mannheim 68131, Germany; Mannheim Center for Competition and Innovation, Mannheim 68131, Germany

Management Science, 2023, vol. 69, issue 5, 2639-2671

Abstract: This paper exploits a major food safety crisis to estimate a full demand model for the unsafe product and its substitutes, recovering consumers’ preference parameters for different product characteristics. Counterfactual exercises quantify the relevance of different mechanisms driving consumers’ responses, such as changes in safety perceptions, idiosyncratic taste, product characteristics, and price. We find that consumers’ reactions are limited by their preferences for the product’s observable and unobservable characteristics. Because of the costs associated with switching from the affected product, the decline in demand following a product-harm crisis tends to understate the true weight of such events in consumers’ utility. We find that unobservable taste is a crucial driver of consumers’ responses. Our counterfactual exercises illustrate that the demand would have declined further if consumers had had access to a closer substitute. For an accurate assessment of product-harm crises, managerial strategies should therefore account for how different demand drivers bind consumers’ substitution patterns.

Keywords: food safety; demand estimation; scanner data; idiosyncratic utility parameters; nutritional preferences; heterogeneous consumers (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:5:p:2639-2671

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