Friday, June 10, 2011

Crisis and Consumption Smoothing Marketing Science 30, 3 (2011) 491-512

The dramatic impact of the current crisis on performance of businesses across sectors and economies has been headlining the business press for many months. Extant reconciliations of these patterns in the popular press rely on ad-hoc reasoning. Using historical data on currency crisis episodes across the world, we examine how consumers respond to a crisis and identify interesting patterns in consumer behavior. The results reveal that consumer behavior in a crisis is characterized by consumption smoothing at various levels – inter-temporal, inter-category and intra-category. These behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions due to a crisis are distinct and independent of the impact of changes in income and prices that accompany it. Interestingly, there is marked variation in patterns of consumption smoothing across different types of economies. Taken together, these results have important and interesting implications for managers, policy makers and academics.