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

Stephan Seiler
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Stephan Seiler: London School of Economics

No 559, 2010 Meeting Papers from Society for Economic Dynamics

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.

Date: 2010
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