State dependence and alternative explanations for consumer inertia

For many consumer packaged goods products, researchers have documented inertia in brand choice, a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past. We show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks. We explore three economic explanations for the observed structural state dependence: preference changes due to past purchases or consumption experiences which induce a form of loyalty, search, and learning. Our data are consistent with loyalty, but not with search or learning. This distinction is important for policy analysis, because the alternative sources of inertia imply qualitative differences in firm's pricing incentives and lead to quantitatively different equilibrium pricing outcomes.