What do consumers consider before they choose? Identification from asymmetric demand responses

Abstract

Consideration set models relax the assumption that consumers are aware of all available options. Thus far, identification arguments for these models have relied either on auxiliary data on what options were considered or on instruments excluded from consideration or utility. In a discrete choice framework subsuming logit, probit and random coefficients models, we prove that utility and consideration set probabilities can be separately identified without these data intensive methods. In full-consideration models, choice probabilities satisfy a symmetry property analogous to Slutsky symmetry in continuous choice models. This symmetry breaks down in consideration set models when changes in characteristics perturb consideration, and we show that consideration probabilities are constructively identified from the resulting asymmetries. In a lab experiment, we recover preferences and consideration probabilities using only data on which items were ultimately chosen, and we apply the model to study hotel choices on Expedia.com and insurance choices in Medicare Part D.

Discrete choice under risk with limited consideration

“…Abaluck & Adams (2018) study identification of an additive error random utility model with consideration formation similar to that in our ARC model, a variant of the RCL model (also considered in Ho, Hogan, & Scott Morton, 2017;Hortaçsu et al, 2017;Heiss et al, 2016), and a mix of the two. Abaluck & Adams (2018) method and ours are distinct and complementary. They require a default option, and the existence of a regressor (e.g., price) that is alternative specific and enters the indirect utility function linearly (or additively separably with shape restrictions).…”

Behavioral Inattention and Human Capital Accumulation

“…In turn, Ellison (2005); Gabaix and Laibson (2006); Ellison and Ellison (2009), and Brown, Hossain, and Morgan (2010) show inattention to other shrouded attributes, like small-font bank fees, or "shipping and handling" costs. Inattention has also been documented in automobile purchases (Lacetera, Pope, and Sydnor, 2012), health plan choices (Abaluck and Adams, 2017), and failing to refinance mortgages (Andersen et al, 2015). Some studies, on the other hand, find results consistent with full attention to key attributes of large purchases.…”

City Equilibrium With Borrowing Constraints: Structural Estimation and General Equilibrium Effects

“…This article's identification strategy relies on the use of mortgage approval data for the estimation of choice set probabilities. Abaluck and Adams () propose an alternative approach: Endogenous choice sets are estimated without the requirement of auxiliary data such as mortgage approval data. Such a methodology would yield estimates of the sensitivity of choice sets to price changes.…”