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

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  • Stephan Seiler

    (London School of Economics)

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    Abstract

    Prices for grocery items differ across stores and time because of promotion periods. Consumers therefore have an incentive to search for the lowest price. When a product is purchased infrequently though, the hassle of checking the price on every shopping trip might outweigh the benefit of spending less. I propose a structural model for storable goods, that takes inventory holdings and search into account. The model is estimated using data on laundry detergent purchases. I find that search costs play a large role in explaining purchase behavior, with a large proportion of consumers not being aware of the price of detergent in a given time period. Trip characteristics such as the amount of money spent on other items and the number of products purchased in the same product category cause the search cost to vary across shopping trips. I also compute between-store price elasticities and find that temporary promotions have little impact on competing stores. There is no post-promotion dip in sales. Permanent price reductions lead to a significant shift in market share towards the store that lowered its price. The adjustment of market shares is almost immediate.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 559.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:559

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    1. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    2. Tülin Erdem & Susumu Imai & Michael Keane, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," Quantitative Marketing and Economics, Springer, vol. 1(1), pages 5-64, March.
    3. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, 06.
    4. Pasquale Schiraldi, 2011. "Automobile replacement: a dynamic structural approach," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 266-291, 06.
    5. Ching, Andrew & Erdem, Tulin & Keane, Michael, 2007. "The Price Consideration Model of Brand Choice," MPRA Paper 4686, University Library of Munich, Germany.
    6. Michelle Sovinsky Goeree, 2005. "Advertising in the US Personal Computer Industry," Industrial Organization 0503002, EconWPA.
    7. David Bell & Christian Hilber, 2006. "An empirical test of the Theory of Sales: Do household storage constraints affect consumer and store behavior?," Quantitative Marketing and Economics, Springer, vol. 4(2), pages 87-117, June.
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    1. repec:dgr:uvatin:2010066 is not listed on IDEAS
    2. Francesco Nava, 2006. "Sales and collusion in a market with storage," LSE Research Online Documents on Economics 41959, London School of Economics and Political Science, LSE Library.

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