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

Stephan Seiler ()
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Stephan Seiler: Stanford University

Quantitative Marketing and Economics (QME), 2013, vol. 11, issue 2, 155-203

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D12 D83 C61 L81 (search for similar items in EconPapers)
Date: 2013
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