How much do consumers know about the quality of products? Evidence from the diaper market

Abstract

To measure the extent of incomplete information about brand qualities faced by consumers, recent research in marketing and economics has extended traditional static choice models to explicitly allow for consumer learning. These models tend to be complicated and make stringent assumptions such as Bayesian updating. In this paper, we provide a simpler alternative method to measure how much consumers know about the quality of quasi-durable products. Our key insight is that for products that depreciate over time and require repeated purchases, individuals’ observed inter-purchase spells provide another measure of brand qualities in terms of durability. This is simply because the higher the durability, the longer a product can last in general, and hence its observed inter-purchase spells should also be longer. Based on this argument, we propose an empirical framework to estimate both the perceived brand quality (based on revealed preference data) and brand durability (based on brand-specific inter-purchase spells) and apply it to a scanner panel dataset for diapers. Our estimates allow us to compare these two measures of qualities and infer the extent of incomplete information faced by parents. With our results, we can address questions such as: Do parents make the right choice in the diapers category? Can they save some money by switching from a national brand to a store brand or the other way around? How much savings can they get?