Knowledge that Transforms

New empirical models of consumer demand that incorporate social effects seek to measure the causal effect of past adopter's behavior—the “installed-base”—on current adoption behavior. Identifying such causal effects is challenging due to several alternative confounds that generate correlation in agents' actions. In the absence of experimental variation, a preferred solution has been to control for these spurious correlations using a rich specification of fixed effects. The authors show that fixed-effects estimators of this sort are inconsistent in the presence of installed-base effects; in simulations, random-effects specifications perform even worse. The analysis reveals the tension the applied empiricist faces in this area: a rich control for unobservables increases the credibility of the reported causal effects, but the incorporation of these controls introduces biases of a new kind in this class of models. The authors present two solutions: a modified version of an instrumental variable approach and a new bias-correction approach, both of which deliver consistent estimates of causal installed-base effects. The empirical application to the adoption of the Toyota Prius Hybrid in California shows evidence for social influence in diffusion and reveals that implementing the bias correction reverses the sign of the measured installed-base effect. The authors also discuss implications of the results for identification of models in marketing involving state dependence in demand, and incorporating discrete games of strategic interaction.

Consumers' time allocation decisions among various activities are fundamental to marketing research and consumer behavior. The authors construct a dynamic panel data model to examine how consumers allocate time to a portfolio of leisure activities over time. The data comprise a longitudinal panel in which the authors tracked 287 U.S. consumers' time use, consumption motives, and expertise measures on a weekly basis from January to June 2011. This is the first empirical research to examine the underlying mechanisms that guide the dynamics of an individual's activity consumption. The authors demonstrate that expertise contributes to the perceived benefits of an activity, which in turn leads to high value associated with it. Expertise also directly influences value obtained from an activity. This expertise, in turn, is acquired over time through past consumption. This finding implies a chain from expertise to value to time use and back to expertise, which may lead consumers to form a lifestyle in which they specialize in a subset of activities they know well. Consequently, expertise can be regarded as a key variable that explains lifestyle choices.

Different framing of the same duration (one year, 12 months, 365 days) can influence consumers’ impressions of subjective duration, thereby affecting their judgments and decisions. The authors propose that, ironically, self-relevance amplifies this duration framing effect. Consumers for whom a particular self-improvement domain is personally relevant are less likely to adopt a one-year self-improvement plan as compared with a 12-month plan because they perceive it as longer and more difficult. This bias is more likely to manifest in consumers who report that the task is highly personally relevant to them, who are making predictions for themselves (vs. others), and who have high (vs. low) task involvement. Personal relevance amplifies this effect because it prompts process-focused simulation of the plan, consequently increasing susceptibility to spurious duration and difficulty cues embedded in frames.

Many firms attempt to enhance experience consumption by facilitating the consumption outcome (i.e., the end state achieved, such as the final score of a basketball game) and the consumption process (i.e., the course through which the end is achieved, such as how the game is played). The authors propose that the roles of outcome and process in the evaluation of experience consumption are dependent not only on consumers’ role in the experience (participant vs. spectator) but also on their self-construal (independent vs. interdependent). As a spectator (e.g., watching a game), independents’ (vs. interdependents') experience consumption evaluations are more likely to be influenced by outcome, while interdependent (vs. independent) consumers are more likely to be affected by process. The reverse is true when consumers assume the role of a participant in the experience (e.g., playing a game). The authors’ theorizing is supported across three studies.

Because utility/profits, state transitions, and discount rates are confounded in dynamic models, discount rates are typically fixed for the purpose of identification. The authors propose a strategy of identifying discount rates. The identification rests on imputing the utility/profits using decisions made in a context in which the future is inconsequential, the objective function is concave, and the decision space is continuous. They then use these utilities/profits to identify discount rates in contexts in which dynamics become material. The authors exemplify this strategy using a field study in which cell phone users transitioned from a linear to a three-part-tariff pricing plan. They find that the estimated discount rate corresponds to a weekly discount factor (.90), lower than the value typically assumed in empirical research (.995). When using a standard .995 discount factor, they find that the price coefficient is underestimated by 16%. Moreover, the predicted intertemporal substitution pattern and demand elasticities are biased, leading to a 29% deterioration in model fit and suboptimal pricing recommendations that would lower potential revenue gains by 76%.

Marketers commonly assume that health claims attached to otherwise unhealthful food stimulate consumption because such claims offer justification for indulgence and reduce guilt. This article proposes a generalized theory of healthful indulgences, identifying when and why people overconsume versus regulate food intake in response to health claims. Four studies demonstrate that not all health claims are created equal. The authors suggest that the nature of the food attributes the claims emphasize—namely, functional versus hedonic—determines the extent of consumption of the indulgence. Health claims featuring functional attributes (e.g., “extra antioxidants”) trigger high levels of health-goal accessibility, which, together with simultaneously accessible indulgence goals attached to the indulgence, results in goal conflict. This conflict leads to reduced consumption of the food. In contrast, health claims featuring hedonic attributes (e.g., “low fat”) render health goals less accessible while accentuating the pleasure dimension of the food, resulting in lower goal conflict and increased consumption of the food. Implications for the food industry and public policy makers are discussed.

How does price sensitivity change with the macroeconomic environment? The authors explore this question by measuring price elasticity using household-level data across 19 grocery categories over 24 quarters. For each category, they estimate a separate random coefficients logit model with quarter-specific price response parameters and control functions to address endogeneity. This specification yields a novel set of 456 elasticities across categories and time that are generated using the same method and therefore can be directly compared. On average, price sensitivity is countercyclical: It rises when the macroeconomy weakens. However, substantial variation exists, and a handful of categories exhibit procyclical price sensitivity. The authors show that the relationship between price sensitivity and macroeconomic growth correlates strongly with the average level of price sensitivity in a category. They examine several explanations for this result and conclude that a category's share of wallet is the more likely driver versus alternative explanations based on product perishability, substitution across consumption channels, or market power.

This article introduces a new determinant of brand extension success, brand extension authenticity (BEA), as a complement to fit. The authors develop the BEA construct and a scale to measure it and then demonstrate that BEA captures consumer perceptions of brand extension legitimacy and cultural contiguity along four interrelated but distinct dimensions: maintaining brand standards and style, honoring brand heritage, preserving brand essence, and avoiding brand exploitation. They demonstrate the power of BEA in predicting consumer reactions to brand extensions, particularly among consumers with strong self–brand connections. Not only is BEA distinct from two conceptualizations of fit in brand extension literature—fit as similarity and fit as relevance—but it also moderates the effects of both fit dimensions on brand extension responses. By capturing a cultural and consumer relational perspective that shapes reactions to brand extensions, BEA provides an important, complementary construct for predicting brand extension success and enhancing brand value. Brand managers attentive to BEA may be able to stretch brands further than assessments of fit alone would suggest, but they risk failure in otherwise well-fitting extensions perceived as inauthentic.