In-store awareness, consideration and brand choice : a ca(u)se for local price response

We develop and test a non-IIA, two-stage choice model for low involvement categories and use a concept called "in-store brand awareness" to predict brand consideration. Theoretically, a choice model that includes consideration sets should display local price response, i.e. the phenomenon that consumers are price-rational only within a bounded set of brands. We find that price response is limited to the consumer- and occasion-specific set of brands that our models predicts as the consideration set. Local price response, as opposed to global price response, has strong implications for the structure of price competition. Cross and own elasticities become conditional on a brand's frequency of consideration set membership. Besides this theoretically and practically poignant result, the two-stage choice model fits the data and predicts choices better than the reference logit model. It also retains the attractive proporties of the logit model in estimation and market segmentation. We segment consumers on the size of the consideration set and quantify the consideration formation process for these different segments. This quantification gives additional support to the concept of local price response