Price Search Across Stores and Across Time

Navid Mojir and K. Sudhir ()
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Navid Mojir: Yale School of Management
K. Sudhir: Yale School of Management and Cowles Foundation

No 1942, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: In response to price dispersion across stores and price promotions over time, consumers search across both stores (spatial) and time (temporal), in many retail settings. Yet there is no search model in extant research that jointly endogenizes search in both dimensions. We develop a model of spatiotemporal search that nests a finite horizon model of spatial search across stores within an infinite horizon model of inter-temporal search. The model is estimated using an iterative procedure that formulates it as a mathematical program with equilibrium constraints (MPEC) embedded within an E-M algorithm to allow estimation of latent class heterogeneity. The empirical analysis uses data on household store visits and purchases in the milk category. In contrast to extant research, we find that omitting the temporal dimension underestimates price elasticity. We attribute this difference to the relative frequency of household stock outs and purchase frequency in the milk category. Further, contrary to the conventional wisdom that promotions increase store switching and reduces store loyalty, we find that in the presence of search frictions, price promotions can be a store loyalty-enhancing tool.

Keywords: Structural models; Sales promotions; Dynamic Programming; Retailing (search for similar items in EconPapers)
JEL-codes: D12 L81 M31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-03, Revised 2016-03
New Economics Papers: this item is included in nep-dge and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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