Pennies for Your Thoughts: Costly Product Consideration and Purchase Quantity Thresholds

46 Pages Posted: 23 May 2016

See all articles by Yufeng Huang

Yufeng Huang

University of Rochester - Simon Business School

Bart J. Bronnenberg

Tilburg University, CentER

Date Written: November 10, 2015

Abstract

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

Suggested Citation

Huang, Yufeng and Bronnenberg, Bart J., Pennies for Your Thoughts: Costly Product Consideration and Purchase Quantity Thresholds (November 10, 2015). Available at SSRN: https://ssrn.com/abstract=2697075 or http://dx.doi.org/10.2139/ssrn.2697075

Yufeng Huang (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://https://sites.google.com/site/yufenghuangphd/

Bart J. Bronnenberg

Tilburg University, CentER ( email )

Warandelaan 2
Tilburg, 5037 AB
Netherlands
+31 13 466 8939 (Phone)
+31 13 466 8354 (Fax)

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