Online demand under limited consumer search

J. Kim, P. Albuquerque, B.J. Bronnenberg

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)1001-1023
JournalMarketing Science
Volume29
Issue number6
Publication statusPublished - 2010

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Consumer search
Amazon
Search costs
Elasticity
Consumer durables
Dynamic programming
Curse of dimensionality
Online markets
Heterogeneous consumers
Politicians
Sequential search
Numerical experiment
Consumer information
Choice models
Policy simulation
Household
Market structure
Market competition
Consumer surplus
Probability distribution

Cite this

Kim, J., Albuquerque, P., & Bronnenberg, B. J. (2010). Online demand under limited consumer search. Marketing Science, 29(6), 1001-1023.
Kim, J. ; Albuquerque, P. ; Bronnenberg, B.J. / Online demand under limited consumer search. In: Marketing Science. 2010 ; Vol. 29, No. 6. pp. 1001-1023.
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Kim, J, Albuquerque, P & Bronnenberg, BJ 2010, 'Online demand under limited consumer search', Marketing Science, vol. 29, no. 6, pp. 1001-1023.

Online demand under limited consumer search. / Kim, J.; Albuquerque, P.; Bronnenberg, B.J.

In: Marketing Science, Vol. 29, No. 6, 2010, p. 1001-1023.

Research output: Contribution to journalArticleScientificpeer-review

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