Simultaneous or Sequential? Search Strategies in the U.S. Auto Insurance Industry
In markets with frequent price fluctuations, costly price search makes it necessary for consumers to choose an optimal subset of products to search before making a final purchase decision. I refer to this subset as the consideration set. Consideration sets are usually not observed, which creates econometric challenges. I show that in storable goods markets it is possible to exploit a new source of variation to identify consideration sets. I study the importance of consideration sets in these markets and evaluate potential biases created by assuming full information and no search costs. To perform the analysis, I estimate a dynamic choice model with consideration sets. Consumers’ consideration sets are derived from an optimization model under imperfect information and costly search. Choice is modeled as a two-stage process where consumers first choose the products to search and then decide whether to purchase one of them. The model is estimated using data on purchases of liquid laundry detergent. My estimates show that consumers incur significant costs to collect information. These costs are lower when products are displayed or featured. I find that the probability of searching and the expected number of searched products decrease with inventory levels. My results demonstrate that ignoring consideration sets and demand accumulation overestimates the own-price elasticity for products that are more often present in consideration sets and underestimates the own-price elasticity for products that are less often present in consideration sets. Firms employ marketing devices to influence consideration sets. These devices have direct and strategic effects, which I explore using the estimates of the model. I show that if such devices were not available, the revenues of some products would increase due to identical search costs, even though the revenues for most of the products would fall. I find that using marketing devices to reduce a product search cost during a price promotion has modest effects on the overall category revenues, and decreases the revenues of some products.