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Adaptive Learning Models of Consumer Behavior

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Topic: Consumer Behavior

Sort Desciption: This paper investigates the hypothesis that whether consumer behavior is best de- .... learning models to consumer behaviour. Weisbuch Kirman and Herreiner ...

Content Inside: Adaptive Learning Models of Consumer Behavior Ed Hopkins Edinburgh School of Economics University of Edinburgh Edinburgh EH8 9JY UK January 2006 Abstract In a model of dynamic duopoly optimal price policies are characterized as- suming consumers learn adaptively about the relative quality of the two products. A contrast is made between belief-based and reinforcement learning. Under re- inforcement learning consumers can become locked into the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast belief-based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state. Journal of Economic Literature classification numbers: C73 D11 D83 L13 M31. Keywords: learning consumer behavior dynamic pricing behavioral economics reinforcement learning market structure. I would like to thank Andreas Blume Pradeep Chintagunta John Duffy Teck Ho Josef Hofbauer Tatiana Kornienko Al Roth Karl Schlag and Jonathan Thomas for helpful discussions. I acknowledge support from the Economic and Social Research Council award reference RES-000-27-0065. Errors remain my own. E.Hopkins@ed.ac.uk http://homepages.ed.ac.uk/ehk 1 Introduction Adaptive learning models attempt to describe the behavior of agents faced with re- peated decision problems by assuming they use simple learning rules. These models are used in a number of apparently disparate environments. Economic theorists have analyzed them in abstract settings. 1 They have been fitted to actual choice data both in economic experiments and the quite different context of the empirical analysis of consumer behavior. 2 Despite differences in aims and terminology some models of dy- namic choice found in empirical marketing analysis are essentially the same as those used in economic theory. This research in marketing ...