Demand in the Wake of an Emerging Middle Class and Low-End Entry

The emerging middle class has become a force of great economic importance in consumer markets around the globe. This paper examines the impact of a substantial rise in Brazil's living standards on the development of the country's large soft-drink market, during a period which saw unprecedented growth in the share of generic soda brands. Relying on a unique combination of richly varying market and consumer-level data, we estimate a novel structural demand model that identifies a mechanism by which a household develops either a 'premium brand habit' or a 'frugal habit'. We find strong empirical evidence of such persistence in preferences, and demonstrate that controlling for such consumption habits is instrumental for identifying the heterogeneous price sensitivities of different socioeconomic groups. Our model casts light on the nature of competition between premium brands and the expanding competitive fringe in an emerging market. In particular, our demand model provides support for Coca Cola Co's abrupt price cut in July 1999, whereas models that do not incorporate our persistence structure provide weaker support for this strategic move