Consumers' Costly Responses to Product-Harm Crises

Link to paper

Joint with Rosa Ferrer.

Using an ideal setting from a major food safety crisis, we estimate a full demand model for the unsafe product and its substitutes and recover consumers' preference parameters. Counterfactual exercises quantify the relevance of different mechanisms --changes in safety perceptions, idiosyncratic tastes, nutritional characteristics, and prices-- driving consumers' response. We find that consumers' reaction is limited by their taste for the product and its nutritional characteristics. Due to the costs associated with switching away from the affected product, the decline in demand following a product-harm crisis tends to understate the true weight of such events in consumers' utility. Indeed, we find that a large fraction of consumers are unresponsive to the crisis even when they significantly downgrade their product safety perception. For an accurate assessment of the crisis, managerial strategies should therefore account for how different demand drivers bind consumers' substitution patterns.