Choice Behavior under Time-Variant Quality: State Dependence versus "Play-It-by-Ear" in Selecting Ski Resorts
Moeltner, Klaus, Englin, Jeffrey, Journal of Business & Economic Statistics
In past studies of consumer loyalty changes in brand attributes over time were generally unobservable and treated as additional model parameters. In this study we consider ski resorts, for which observable quality attributes change frequently. Using a repeated-purchase model with observed time-variant brand attributes, indicators for state dependence, and individual heterogeneity, we show that purchase history and time-variant site characteristics have a significant and offsetting effect on repurchase decisions. This suggests a third category of consumer along with habit formers and variety seekers, the "play-it-by-ear" type, who, unaffected by purchase history, mores across brands in pursuit of high quality.
KEY WORDS: Random parameters; Repeated brand choice; Simulated choice probabilities; Time-variant quality features.
When consumers repeatedly choose among several products, past choices can affect the probability of selecting a given product again at a later occasion. This phenomenon is commonly called "state dependence" (Heckman 1981a). Generally, state dependence can increase a consumer's propensity to repurchase a specific good (habit formation) or decrease the probability of repurchase (variety-seeking). A key element of the research on the effects of state dependence to date has been the stability of observed characteristics for goods under consideration. The present study examines the role of purchase history for products with both fixed and time-variant observed attributes. This allows us to disentangle effects attributable to state dependence from those associated with quality variation. Our empirical application is based on a set of ski areas in the Sierra Nevada; the time-variant quality attributes are snow and temperature.
In the marketing literature, state dependence is often called "purchase carryover" or "purchase-event feedback" (Allenby and Lenk 1995; Keane 1997). Understanding these forces that guide consumer choice is important to managers when making marketing and pricing decisions. Keane (1997) pointed out that temporary promotional efforts may affect consumer behavior well into the future if people are susceptible to habit formation. On the other hand, if consumer choice is relative insensitive to past purchases, or if variety-seeking is the dominant element of state dependence, then the promotional impact on sales may be short-lived.
The effect of state dependence on choice behavior has also become a topic of interest in the recreation literature (see, e.g., McConnell, Strand, and Bockstael 1990; Adamowicz 1994; Smith 1997). In those studies, the "products" from which people are choosing are not food or household items, as commonly investigated in marketing research, but rather recreation sites, such as fishing spots (Adamowicz 1994; Swait, Adamovicz, and van Bueren 2000) or beach destinations (McConnell et al. 1990). In this context, understanding demand effects attributable to state dependence aid public land managers in making policy decisions on site access, pricing, and quality.
Regardless of the application, researchers must take care to disentangle "true" state dependence (Heckman 1981a) from the effect of time-variant exogenous variables and consumer heterogeneity. The estimated effect of true state dependence may be inflated if consumer preferences are erroneously assumed to be homogeneous, or if time-variant exogenous variables are omitted (Heckman 1981a; Keane 1997; Erdem and Sun 2001). In recent marketing contributions, heterogeneity has been explicitly captured in repeated-choice models by introducing random coefficients into random utility models (RUMs) (Allenby and Lenk 1995; Erdem 1996; Keane 1997). Allenby and Lenk (1995), Erdem (1996), Keane (1997), and Erdem and Sun (2001) also included time-varying exogenous variables (price and marketing effort) to disentangle their effect on purchase decisions from true state dependence. …