DP16632 Identifying State Dependence in Brand Choice: Evidence from Hurricanes

Author(s): Julia Levine, Stephan Seiler
Publication Date: October 2021
Date Revised: June 2022
Keyword(s): Brand Choice, Brand Loyalty, preference heterogeneity, State Dependence
JEL(s): D12, L81
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16632

We analyze structural state dependence in brand choice using variation from brand switching during stock-outs caused by hurricanes. We derive a simple test for structural state dependence based on the time-series of choice persistence for households affected by the stock-outs. Using data from the bottled water category, we show that demand increases substantially before hurricanes and causes households to purchase different brands. We find that purchase behavior reverts back to its pre-hurricane trajectory immediately after a hurricane and we are not able to reject the null hypothesis of no structural state dependence. By contrast, the common approach of estimating structural state dependence based on temporal price variation via a discrete choice model yields a positive effect using data for the same category. We argue that our approach is better suited to identify the causal impact of past choices because it requires fewer assumption and is based on more plausibly exogenous variation in brand switching due to stock-outs.