Consumer learning in a turbulent Market environment: Modeling Consumer Choice Dynamics after a Product-harm Crisis

Abstract

The authors empirically study consumer choice behavior in the wake of a product-harm crisis, which creates consumer uncertainty about product quality. They develop a model that explicitly incorporates the impact of such uncertainty on consumer behavior, assuming that consumers are uncertain about the mean product quality level and learn about product quality through the signals contained in use experience and the product-harm crisis and also that consumers are uncertain about the precision of the signals in conveying product quality and update their perception of this precision over time. They estimate this model using a scanner panel data set that includes consumer purchase history before, during, and after a product-harm crisis that affected Kraft Foods australia's peanut butter division in June 1996. The proposed model fits the data better than the standard consumer learning model, which assumes consumers are uncertain about product quality level but the precision of information in conveying product quality is known. This study also provides insights into consumers’ behavioral choice responses to a product-harm crisis. Finally, the authors conduct counterfactual experiments based on the estimation results and provide insights to managers on crisis management.