Heterogeneity and nonlinearity in consumers' preferences: An application to the olive oil shopping behavior in Chile

In relatively unknown products, consumers use prices as a quality reference. Under such circumstances, the utility function can be non-negative for a specific price range and generate an inverted U-shaped function. The extra virgin olive oil market in Chile is a good example. Although domestic production and consumption have increased significantly in the last few years, consumer knowledge of this product is still limited. The objective of this study was to analyze Chilean consumer preferences and willingness to pay for extra virgin olive oil attributes. Consumers were segmented taking into account purchasing frequency. A Random Parameter Logit model was estimated for preference heterogeneity. Results indicate that the utility function is nonlinear allowing us to differentiate between two regimes. In the first regime, olive oil behaves as a conspicuous good, that is, higher utility is assigned to higher prices and consumers prefer foreign products in smaller containers. Under the second regime, Chilean olive oil in larger containers is preferred.