Consideration Set Formation and Purchase Behavior in Online Platforms

Abstract

Online platforms have the unique ability of offering virtually unlimited assortments. However, they often assume frictionless conditions in the purchase process which may not always hold in practice. We study the impact of heterogeneous search costs on the formation of consideration sets, and how consumers' purchase behavior responds to changes in the online assortment size. We first build a consider-then-choose framework to study how customers who have different familiarity with the options form their consideration sets and make subsequent purchase decisions. We then leverage a field experiment and detailed clickstream datasets to support our theoretical results. We further conduct counterfactual analyses to emulate customers' decision making process under different assortment reductions.

Keywords: Choice Overload, E-Commerce, Online Controlled Experiments, Retail, Search Costs

JEL Classification: C9, D12, M31