Consumer Behaviour , Feedback Information and the Supermarket Industry

The purpose of this thesis is threefold: First, to explain how learning shapes consumer behaviour over a comestible (experience) good. Second, to examine the role of feedback information and information aggregation for consumer choices and market performance in markets for experience goods. Third, to understand how firms react to heterogeneous consumer choices in the supermarket industry when faced with institutional constraints. To shed light on how learning influences consumer choices over time in particular when new products or new characteristics are introduced, we employ in Chapter 2 a model of reinforcement learning over products as well as characteristics and apply it to yoghurt drink purchases from a large British consumer panel. We find that learning over both, products and characteristics, is important in explaining consumer choices over time. How consumer choices are influenced by the choice of others is analysed in Chapter 3 which introduces and studies a new model of aggregate information cascades. We find that if only one of two possible actions is observable —say, how many others bought a particular product but not how many chose not to buy it—only one type of cascade arises in equilibrium. Herding only takes place on the observable action. A different angle on how the provision of information bears on choices is taken in Chapter 4 on learning trust. Here we examine the effect of different forms of feedback information to consumers and sellers in a market with sequential exchange. Experimental evidence shows that both feedback information on sellers’ history to consumers but also feedback information about sellers trading history to other sellers improves market efficiency. How firms optimally react to institutional constraints when consumer choice heterogeneity is important is developed in Chapter 5 in a model of supermarket entry into different store formats and applied to data from the UK. We are interested in estimating the cost of the institutional constraint of restrictive planning regulation. We find that the institutional set­ up matters but the impact of restrictive planning regulation on firm profits is small and increases barriers to entry for large supermarkets only.