The impact of search costs on consumer behavior: a dynamic approach
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.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gautam Gowrisankaran & Marc Rysman, 2007.
"Dynamics of Consumer Demand for New Durable Goods,"
Boston University - Department of Economics - Working Papers Series
WP2007-024, Boston University - Department of Economics.
- Gautam Gowrisankaran & Marc Rysman, 2009. "Dynamics of Consumer Demand for New Durable Goods," NBER Working Papers 14737, National Bureau of Economic Research, Inc.
- Marc Rysman & Gautam Gowrisankaran, 2011. "Dynamics of Consumer Demand for New Durable Goods," Boston University - Department of Economics - Working Papers Series WP2011-062, Boston University - Department of Economics.
- Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
- Pasquale Schiraldi, 2011.
"Automobile replacement: a dynamic structural approach,"
RAND Journal of Economics,
RAND Corporation, vol. 42(2), pages 266-291, 06.
- Pasquale Schiraldi, 2010. "Automobile Replacement: A DynamicStructural Approach," STICERD - Economics of Industry Papers 49, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Pasquale Schiraldi, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics 21780, London School of Economics and Political Science, LSE Library.
- João L. Assunção & Robert J. Meyer, 1993. "The Rational Effect of Price Promotions on Sales and Consumption," Management Science, INFORMS, vol. 39(5), pages 517-535, May.
- Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-1130, December.
- Hoyer, Wayne D, 1984. " An Examination of Consumer Decision Making for a Common Repeat Purchase Product," Journal of Consumer Research, Oxford University Press, vol. 11(3), pages 822-829, December.
- Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
- Ching, Andrew & Erdem, Tulin & Keane, Michael, 2007.
"The Price Consideration Model of Brand Choice,"
4686, University Library of Munich, Germany.
- Erdem, Tulin & Imai, Susumu & Keane, Michael, 2003.
"Brand and Quantity Choice Dynamics Under Price Uncertainty,"
52516, University Library of Munich, Germany.
- Tülin Erdem & Susumu Imai & Michael Keane, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 5-64, March.
- 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.
- Michelle Sovinsky Goeree, 2008. "Limited Information and Advertising in the U.S. Personal Computer Industry," Econometrica, Econometric Society, vol. 76(5), pages 1017-1074, 09.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
- Igal Hendel & Aviv Nevo, 2003. "The Post-Promotion Dip Puzzle: What do the Data Have to Say?," Quantitative Marketing and Economics (QME), Springer, vol. 1(4), pages 409-424, December.
- 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.
- Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
When requesting a correction, please mention this item's handle: RePEc:red:sed010:559. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.