An Examination of How Latent Costs Shape Consumer Purchase Behavior.

Abstract

This dissertation contains two essays that explore ways in which latent, short-term “costs” shape consumers’ purchase behavior, and consequently influence long-term outcomes. The first essay, “Modeling Consideration Set Substitution,” examines consumer search, which involves a trade-off of short-term effort for long-term utility. More specifically, it illustrates the importance of accounting for consideration set substitution when modeling demand in markets where consumers engage in search. Consideration set substitution refers to a consumer considering one alternative at the expense of considering another. For example, if an advertisement for the Ford Fusion induces a consumer to consider the Ford Fusion when he is on the market for a car, this may cause him not to consider another vehicle he otherwise would have, had he not seen the advertisement. The second essay, “Frugality is Hard to Afford,” examines whether low income households are less able than higher income households to take advantage of intertemporal savings strategies commonly available in everyday purchase categories due to liquidity constraints. Two strategies are investigated: buying in bulk and accelerating purchase timing to take advantage of sales. Both involve trading off the cost of an increase in short-term expenditure for the reward of long-term savings. Because low income households are more likely to face liquidity constraints, they may be less able to utilize these two strategies. Together, these two essays contribute to our knowledge of how consumers’ purchase decisions are influenced by “costs” other than price. Essay one aids our ability to measure consumers' responsiveness to marketing actions by more precisely modeling their decision-making process. Essay two contributes to our knowledge of low income consumers' limited ability to make intertemporal financial trade-offs—even for seemingly low-priced goods—and why they may be less responsive to some marketing actions as a result.