Consumers’ Costly Responses to Product-Harm Crises

Abstract

This paper exploits a major food safety crisis to estimate a full demand model for the unsafe product and its substitutes, recovering consumers' preference parameters for different product characteristics. Counterfactual exercises quantify the relevance of different mechanisms|changes in safety perceptions, idiosyncratic tastes, product characteristics, and prices|driving consumers' responses. We find that consumers' reaction is limited by their preferences for the product's observable and unobservable characteristics. Due to the costs associated with switching 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. We find that unobservable taste is a crucial driver of consumers' responses. Our counterfactual exercises illustrate that the demand would have declined further if consumers had had access to a closer substitute. For an accurate assessment of product-harm crises, managerial strategies should therefore account for how different demand drivers bind consumers' substitution patterns.