A Direct Utility Model for Access Costs and Economies of Scope
Kim, Dong Soo, Sanghak Lee, Taegyu Hur, Jaehwan Kim, and Greg M. Allenby (2023) “A Direct Utility Model for Access Costs and Economies of Scope,” Management Science, forthcoming.
Posted: 25 Aug 2015 Last revised: 3 Jan 2023
Date Written: June 30, 2021
Consumers encounter costs and inconvenience in the purchase and consumption of goods. Time, effort, training, and expertise, also referred to as access costs, are examples of factors that constrain the ability of consumers to derive utility from offerings beyond the price of a good. Economies of scope exist when household production of these factors share commonalities among choice alternatives, making it more likely that some products would be purchased and consumed in conjunction with others. For example, consumers planning out-of-town travel might consider visiting multiple tourist attractions during their trip, and course offerings might appeal more to students who are already in the mindset of taking courses. We develop a model with economies of scope that captures a leveraging effect where the purchase of one good makes the purchase of other goods more likely. Our model offers an alternative explanation of complementary purchases that are driven by cost reductions rather than utility enhancements. The model is applied to four conjoint datasets where we find that economies of scope and access costs play an important role in consumer purchases and have high economic value relative to the role played by price.
Keywords: Budget Constraint, Time Costs, Cross-selling
JEL Classification: C25, C40, M31
Suggested Citation: Suggested Citation