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Quantitative Marketing and Economics

, Volume 11, Issue 2, pp 155–203 | Cite as

The impact of search costs on consumer behavior: A dynamic approach

  • Stephan SeilerEmail author
Article

Abstract

Prices for grocery items differ across stores and time because of promotion periods. Consumers therefore have an incentive to search for the lowest prices. However, when a product is purchased infrequently, the effort to check the price every shopping trip might outweigh the benefit of spending less. I propose a structural model for storable goods that takes into account inventory holdings and search. The model is estimated using data on laundry detergent purchases. I find search costs play a large role in explaining purchase behavior, with consumers unaware of the price of detergent on 70 % of their shopping trips. Therefore, from the retailer’s point of view raising awareness of a promotion through advertising and displays is important. I also find a promotion for a particular product increases the consumer’s incentive to search. This change in incentives leads to an increase in category traffic, which from the store manager’s perspective is a desirable side effect of the promotion.

Keywords

Dynamic demand estimation Search costs Imperfect information Storable goods Stockpiling 

JEL Classification

D12 D83 C61 L81 

Notes

Acknowledgements

I would like to thank my advisors John Van Reenen and Pasquale Schiraldi for their invaluable guidance and advice. I am also grateful to Michaela Draganska, Alan Sorenson and Tat Chan who discussed the paper for great feedback as well as participants at various conferences and seminar participants at the London School of Economics, the Institute for Fiscal Studies, Frankfurt, CREST (Paris), Stanford, UCLA, Rochester, Washington University in St. Louis, Carnegie Mellon, Chicago, San Diego, Zurich, Tilburg and Northwestern. I would also like to thank Rachel Griffith at the Institute for Fiscal Studies for great help with the data and detailed discussions as well as Pedro Gardete, Joachim Groeger, Wes Hartmann, Guenter Hitsch, Claire LeLarge, Fabio Pinna, Peter Rossi, Thomas Schelkle, Philipp Schmidt-Dengler and two anonymous referees for helpful comments. Any remaining errors are my own. A previous version of this paper was circulated under the title “A Dynamic Model with Consideration Set Formation”.

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Stanford UniversityStanfordUSA
  2. 2.The Institute for Fiscal StudiesLondonUK
  3. 3.Centre for Economic PerformanceLondon School of EconomicsLondonUK

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