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Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity

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Abstract

This paper offers a new identification strategy for disentangling structural state dependence from unobserved heterogeneity in preferences. Our strategy exploits market environments where there is a choice-consumption mismatch. We first demonstrate the effectiveness of our identification strategy in obtaining unbiased state dependence estimates via Monte Carlo analysis and highlight its superiority relative to the extant choice-set variation based approach. In an empirical application that uses data of repeat transactions from the car rental industry, we find evidence of structural state dependence, but show that state dependence effects may be overstated without exploiting the choice-consumption mismatches that materialize through free upgrades.

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  • K. Sudhir & Nathan Yang, 2014. "Exploiting the Choice-Consumption Mismatch: A New Approach to Disentangle State Dependence and Heterogeneity," Cowles Foundation Discussion Papers 1941, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1941
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    4. Granlund, David, 2019. "A new approach to estimating state dependence in consumers’ brand choices applied to 762 pharmaceutical markets," Umeå Economic Studies 960, Umeå University, Department of Economics.
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    More about this item

    Keywords

    Consumer dynamics; Heterogeneity; Quasi-experiment econometrics; Service industry; State dependence;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • L00 - Industrial Organization - - General - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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