The Effect of Consideration Set on Market Structure

Abstract

We estimate a choice-based aggregate demand model accounting for consumers" consideration sets, and study its implications on market structure. In contrast to past research, we model and estimate consumer demand using aggregate-level consumer browsing data in addition to aggregatelevel choice data. The use of consumer browsing data allows us to study consumer demand in a realistic setting in which consumers choose from a subset of products. We calibrate the proposed model on both data sets, avoid biases in parameter estimates, and compute the price elasticity measures. As an empirical application, we estimate consumer demand in the camcorder category and study its implications on market structure. The proposed model predicts a limited consumer price response and offers a more discriminating competitive landscape from the one assuming universal consideration set.