Determining Where to Shop: Fixed and Variable Costs of Shopping

Abstract

The authors develop and test a new model of store choice behavior whose basic premise is that each shopper is more likely to visit the store with the lowest total shopping cost. The total shopping cost is composed of fixed and variable costs. The fixed cost is independent of, whereas the variable cost depends on, the shopping list (i.e., the products and their respective quantities to be purchased). Besides travel distance, the fixed cost includes a shopper's inherent preference for the store and historic store loyalty. The variable cost is a weighted sum of the quantities of items on the shopping list multiplied by their expected prices at the store. The article has three objectives: (1) to model and estimate the relative importance of fixed and variable shopping costs, (2) to investigate customer segmentation in response to shopping costs, and (3) to introduce a new measure (the basket size threshold) that defines competition between stores from a shopping cost perspective. The model controls for two important phenomena: Consumer shopping lists might differ from the collection of goods ultimately bought, and shoppers might develop category-specific store loyalty.