The Lucas Critique is a well know argument in economics that challenged many traditional results. The critique suggests that economic agents (here consumers) are forward looking and adapt their expectations and behaviour given the marketers’ actions. Successful promotions tend to train consumers to expect promotions and so the promotions may become less successful going forward.
Harald Van Heerde, Marnik Dekimpe and William Putsis Jr. discuss the implications of the Lucas Critique for marketing models. They argue that three requirements are needed for the critique to have a significant impact. (Here a policy change is some sort of action by a marketer). “1) Economic agents are aware of the policy change, 2) economic agents are motivated to change their behavior as a direct consequence of the policy change, and 3) economic agents are able to change their behavior.” (Van Heerde, Dekimpe and Putsis, 2005, page 15). This makes sense; if consumers don’t know about it, don’t care about it, or have no choice they won’t change their behavior given a new stimulus.
If the Lucas Critique holds this creates a major problem for simple ‘reduced form models’. Just because you see a historic relationship in data does not mean much if consumers are changing the way they behave given your actions. Where exactly the Lucas Critique applies depends upon the specifics of the choice, but it is likely a problem in some markets. “Consumers and retailers may anticipate product changes in categories with constantly improving technology” (Van Heerde, Dekimpe and Putsis, 2005, page 20). In other markets the problem may be pretty minor. If shoppers don’t know the prices that they are paying in supermarkets “how can they be expected to notice price changes, alter their price expectations, and adjust their behavior strategically?” (Van Heerde, Dekimpe and Putsis, 2005, pages 15-16).
The overall lesson is that we need to pay attention to our assumptions and understand the markets we analyze. Consumers in different markets may react, or fail to react, in very different ways.
Read: Harald Van Heerde, Marnik Dekimpe and William Putsis Jr. (2005) Marketing Models and the Lucas Critique, Journal of Marketing Research 62 15-21.