Essays on Consumer Behavior and Demand Analysis

Abstract

The thesis consists of two loosely related essays. Both are motivated by consumers’ behavior regularities in different market environments. My goal is to show evidence of behavioral biases among decision makers and the consequences of those behavioral effects. Given each market’s environment, I found evidence that consumers tend to deviate from what conventional theories dictate and the deviation may affect welfare analysis.

The first market is a non-durable experience good market. Using empirical scanner data,we show evidence that consumers’ switching rates among brands are higher than what brand characteristics and consumer heterogeneity can explain. The over-switching behavior may be consistent with consumers’ brand satiation. As a result, the consumers may benefit more from a market with more variety. We provide a structural model of the satiation behavior and use the model to demonstrate the model prediction as well as the welfare effect. The second market is a laboratory sequential search market where sellers are allowed to use exploding offers. We show evidence that buyers may be affected by non-monetary incentives, which result in a higher rejection rate for the exploding offers. After accounting for the above mentioned “exploding offer aversion”, sellers’ optimal strategies may be shifted. As a result, sellers tend to use lower price as well as non-exploding offers more often.