Journal Article

Online Demand Under Limited Consumer Search

Kim, Jun B., Bronnenberg, Bart J., Albuquerque, Paulo

2010

Overview

Using aggregate product search data from Amazon.com, we jointly estimate consumer information search and online demand for consumer durable goods. To estimate the demand and search primitives, we introduce an optimal sequential search process into a model of choice and treat the observed market-level product search data as aggregations of individual-level optimal search sequences. The model builds on the dynamic programming framework by Weitzman [Weitzman, M. L. 1979. Optimal search for the best alternative. Econometrica 47 (3) 641-654] and combines it with a choice model. It can accommodate highly complex demand patterns at the market level. At the individual level, the model has a number of attractive properties in estimation, including closed-form expressions for the probability distribution of alternative sets of searched goods and breaking the curse of dimensionality. Using numerical experiments, we verify the model's ability to identify the heterogeneous consumer tastes and search costs from product search data. Empirically, the model is applied to the online market for camcorders and is used to answer manufacturer questions about market structure and competition and to address policy-maker issues about the effect of selectively lowered search costs on consumer surplus outcomes. We demonstrate that the demand estimates from our search model predict the actual product sales ranks. We find that consumer search for camcorders at Amazon.com is typically limited to 10-15 choice options and that this affects estimates of own and cross elasticities. In a policy simulation, we also find that the vast majority of the households benefit from Amazon.com's product recommendations via lower search costs.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences (INFORMS),TIMS/ORSA,Institute for Operations Research and the Management Sciences
• Subject: Aggregate data / Alternative approaches / Amazon.com Inc / Analysis / Behavior / Brands / Camcorders / Capital costs / consideration sets / Consumer education / Consumer electronics / Consumer goods / Consumer information / Consumer spending / Consumers / Cost benefit analysis / Cost efficiency / Costs / Dauerhafte Konsumgüter / Decision making models / Demand / demand for durable goods / Distanzhandel / Durable goods / Economic models / Elasticity / Electronic commerce / Estimates / Evaluation / Expected utility / Experiments / Households / Individual differences / Information and communication technologies / information economics / Information search / Informationsverhalten / Internet / Konsumentenverhalten / Market structure / Marketing / Markets / Mathematical optimization / Online searching / Online-Handel / optimal sequential search / Price elasticity / Products / Property / Question answer sequences / Sales / Search strategies / Searches / Sequences / Simulation / Studies / Sumer / Supply and demand / Utilities costs / Websites