Pennies for Your Thoughts: Costly Product Consideration and Purchase Quantity Thresholds
46 Pages Posted: 23 May 2016
Date Written: November 10, 2015
Why are consumers unresponsive to small price discounts? This paper proposes that it is costly to consider the purchase of a product, even given full information. As a result, a consumer will rationally not consider a product (and thus will not purchase) until the price becomes favorable, at which point she will buy enough quantity that justifies the fixed cost of consideration. In this paper, we identify consideration cost through discontinuities in the purchase quantity at these “marginal” prices. We then construct a love-of-variety model of demand, explicitly modeling the choice of consideration set. Estimating this model using data from the yogurt category, we find that considering each yogurt product costs $1.37 for consumers familiar with the product, against a 4 fold for consumers unfamiliar with it. Such mental cost discourages allocating expenditure across many products. A new consumer with love-of-variety tastes would purchase 50% more varieties if she were familiar with all the products. Finally, at our estimates, larger costs of consideration increase price sensitivity of new consumers.
Keywords: love for variety, promotion threshold, cost of thinking, limited consideration
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