Pennies for Your Thoughts: Costly Product Consideration and Purchase Quantity Thresholds

Individual demand for consumer packaged goods shows discrete jumps between zero and large quantities, under a marginal change in price. Ruling out multiple alternative explanations, this paper provides evidence from microdata in the yogurt category that these jumps are caused by consumer fixed purchasing costs per product. We formulate and estimate a model in which (1) such fixed costs limit the number of different products considered and (2) consumers use prices to screen a product in and out of their consideration set. Our structural estimation finds that the consumer incurs fixed costs of $0.81 to consider a product. These costs are increased by 280% if she has not purchased the product for a year and are decreased by 59% when the product is featured in the store; the dependence of fixed costs on information shifters suggests that these costs are incurred because of consideration. Consideration being scarce at the shelf, firms compete fiercely for customers: We simulate counterfactual markups in a world full of feature advertising and find that firms enjoy higher equilibrium markups because the provision of information softens competition for consideration.