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

Yan Chen () and Ginger Zhe Jin ()
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Yan Chen: Bates White
Ginger Zhe Jin: University of Maryland

Chapter Chapter 5 in The Value of Information, 2012, pp 91-141 from Springer

Abstract: 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 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/978-94-007-4839-2_5

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