Consumer Learning and Brand Valuation: An Application on Over-the-Counter Drugs

We develop a brand choice model with learning based on the Kalman filter methodology. The model enables us to separate the effects of contemporaneous marketing promotions from the impact of the perceived quality valuation accrued through product usage over time. We also account for idiosyncratic consumer learning and preferences. The results point to the presence of heterogeneity in the valuation carryover coefficients across consumers and brands. In contrast to our expectations, a higher price is not important for most of the consumers in the sample. The model enables us to compare brands in terms of their memorability, which determines brand salience on the next purchase occasion. Our findings suggest that price promotions may be deficient as a tool to increase market share in the studied product category. The proposed model is applicable to other consumer goods contingent on consumers' being sufficiently motivated to learn their own preferences via personal experience. Brand managers can use the model for comparative diagnostics and market performance simulation under different price and promotion scenarios. This paper is instructive to the application of a relatively new methodology; we illustrate the analytical potential of the model by demonstrating its inferential power in a specific marketing context.