Costly search and consideration sets in storable goods markets
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Costly search can result in consumers restricting their attention to a subset of products–the consideration set–before making a final purchase decision. The search process is usually not observed, which creates econometric challenges. I show that inventory and the availability of different package sizes create new sources of variation to identify search costs in storable goods markets. To evaluate the importance of costly search in these markets, I estimate a dynamic choice model with search frictions using data on purchases of laundry detergent. My estimates show that consumers incur significant search costs, and ignoring costly search overestimates the own-price elasticity for products more often present in consideration sets and underestimates the elasticity of frequently excluded products. Firms employ marketing devices, such as product displays and advertising, to influence consideration sets. These devices have direct and strategic effects, which I explore using the estimates of the model. I find that using marketing devices to reduce a product’s search cost during a price promotion has modest effects on the overall category revenues, and decreases the revenues of some products.
KeywordsSearch costs Consideration set Information Storable goods Dynamic discrete-choice models
JEL ClassificationD12 D83 L81
I am especially indebted and grateful to Aviv Nevo for his advice, guidance and support. I am also indebted and grateful to Igal Hendel and Robert Porter for valuable comments and discussions. I would like to thank Alberto Salvo, Brian McManus, Andre Trindade, Mike Abito, Guillermo Marshall, Agnieszka Roy, Arkadiusz Szydlowski, Sergio Urzua, Esteban Petruzello, Fernando Luco, Eric Anderson, Robin Lee, Song Yao, David Henriques, Tiago Botelho, Claudia Alves, Ernesto Freitas, MathisWagner, Mike Powell, David Miller, Jose Espin-Sanchez, Maja Kos, and seminar participants at Northwestern University, University of Toronto, Northeastern University, Tilburg University, Einaudi Institute for Economics and Finance, Banco de Portugal, University of North Carolina, Oklahoma University, Bates White, and Compass Lexecon for their suggestions. I am thankful to IRI and particularly Mike Kruger for generously supplying the data. Financial support from Fundaca̧o para a Cîencia e Tecnologia under the scholarship SFRH/BD/43857/2008 is also gratefully acknowledged. This paper is a revised chapter from my dissertation at Northwestern University. All errors are my responsibility.
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