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The effect of raising searching obstacles on online purchasing behavior: proof from field experiment


par Boris Helios Zocete LOKONON KOUDOGBO
Taiyuan University of Technology - Master of Business Administration 2020
  

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School of Management | Taiyuan University of Technology

THE EFFECT OF RAISING SEARCHING OBSTACLES ON ONLINE PURCHASING BEHAVIOR: PROOF FROM FIELD EXPERIMENT

LOKONON KOUDOGBO Boris Helios Zocete

Taiyuan University of Technology Li Qi Geng

AGO Francine Mariette Supervisor

Taiyuan University of Technology Taiyuan University of Technology

February, 2020

The effect of raising searching obstacles on online purchasing behavior: Proof from field

experiment

Abstracts

While online retail allows consumers to obtain goods or services directly from a seller via an additional channel, operating margins are often lower in online stores than in physical stores. There are well-known reasons for this disparity: price comparisons are easier to do online, coupons and codes are more widely adopted, and marketers often bear the cost of shipping products to buyers. Most online stores are designed for frictionless shopping, with few barriers to finding and buying discounted products. We propose that the intentional addition of search frictions - barriers to locating discounted items - may improve online retailers' margins by allowing shoppers to choose between «paying with money» (low discount) or «pay with effort» (high discount). In a series of field experiments carried out with an electronic commerce platform specializing in diasporas connecting buyers and sellers, we show that getting customers more difficulties in finding products at a reduced, reduced price the average discount on items purchased without reducing the impact of purchases or the average selling price. By using transaction information from existing customers, we show that price-sensitive buyers are more likely to make efforts to locate heavily discounted items. Our results posted that adding research frictions can be used as a self-selected price discrimination tool to offer high discounts to price-sensitive consumers and reduce the number of price-insensitive consumer subsidies.

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Keywords: e-commerce, online purchasing, obstacles, search costs, price discrimination

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1. Introduction

Online retailing expands business access to consumers through an addition channel, but operating margins are often lower in online stores than in physical stores. Afrimarket, the largest online reseller in Benin, achieved average operating margins of 2.8% between 2013 and 2018, while its traditional counterparts earn between 4% and 8% (Insae, 2018). The reasons for this difference are well known: price comparisons are easier online, coupons and codes have higher adoption, and sellers often bear the cost of shipping products to buyers.

Consumers shop online for products that are also available in brick-and-mortar stores because it is generally easier to browse a large selection of goods and fulfill transactions online (Teixeira and Gupta 2015). Online retailers like Afrimarket, Odjala, and mymotherlandstuffs are continually striving to lower search, transaction, and delivery costs for consumers. Afrimarket is the best example of an electronic commerce platform that systematically reduces the obstacles of online search.

This trend contrasts sharply with the practice of physical stores that have long accepted the deliberate use of research frictions to improve store revenues. By making it more difficult to locate discounted or otherwise less expensive items, by placing the sales section at the back of the store or in a separate store, physical stores can induce self-selection among the consumers who stand out. by their sensitivity to price and their willingness to search.

In this paper, we seek to challenge the prevailing assumption that minimizing search frictions, i.e., facilitating consumer search across a retailer's entire assortment, is the optimal strategy for online retailers selling searchable branded goods (Bakos 1997, Brynjolfsson and Smith 2000). We argue that, just as in physical sales contexts, careful integration of research frictions can facilitate price discrimination in online retailing.

The existing literature has typically conceived of search costs as the time, effort, and money required to physically identify and consider additional options before making a purchase decision (Bell, Ho and Tang 1998). Given the ease and immediacy of online shopping, it is not surprising that equivalent search costs have not been studied as tools that a company would use to implement discrimination based on price. We identify and explore the power of search costs in online settings: the effort of clicking an additional link, displaying an additional page, scrolling through a catalog of articles, or mentally calculating the discount percentage on

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a sale item.

We assume that, under certain conditions, an online retailer can improve its gross margins by increasing the search costs associated with the search and purchase of discounted items on its website. The first condition is that there is a negative correlation between price sensitivity and sensitivity to research costs: consumers who are more concerned about getting good deals are less concerned about making efforts to locate them. The second condition is that by encountering these additional research frictions, price-insensitive consumers would replace very small items with smaller items. The third condition is that price-sensitive consumers would make the extra effort required

To test our hypothesis, we conducted a series of field experiments with online kitchen items and tableware retailer. This category is particularly attractive for our purpose as it has a moderate frequency and purchase value. Consumers are broadly aware of price points for kitchen items and tableware but not completely certain of item prices at any given purchase occasion. And, luxury brands notwithstanding, item prices are material but not exorbitant to most shoppers. Lastly, it is common practice for kitchen items and tableware retailers to frequently offer sizeable discounts to acquire and retain customers.

As part of the first trial, we randomly distributed new visitors on an online platform for a week in one of the reference groups or one of the three treatment groups. The supply and price of the products remain unchanged under all conditions. Each process means increasing search friction in some way: (1) deleting the direct contact with the point of sale because of the large reduction of the point of sale; (2) deleting the order by delivery option; (3) deleting the delivery mark unique to this article. We note that in each of these cases, the average discount rate for purchases is much lower than the control state without reducing the conversion rate. These results demonstrate the power of the treatments we have chosen and support our hypothesis.

In a follow-up analysis, we aim to establish the mechanism underlying the results of our first experience. We use the historical transaction data of existing customers to pre-classify them according to their price sensitivity. To do this, we downgrade the last basket update to demographic and past purchase variables and then use the expected values as an approximation of price sensitivity. We endorse this classification by showing that buyers we identify as price-sensitive are much more likely to click on random price electronic newsletters (rather than on

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the discounts mentioned).

In our second experiment, we randomly assigned all visitors, new and existing, to the online store for two weeks, to a control group or one of four treatment groups. Once again, product availability and prices are kept constant under all conditions. We are resuming the treatments of our first experience and include the replacement of discount banners with no discount banners as an additional condition. The goal is to identify the presence of self-selection among all of the company's customers, as price-sensitive consumers are relatively immune to additional search costs, but price-insensitive consumers are not.

We find that, as in the first experiment, the average discount on purchased items is lower in the treatment groups than in the control group, while the conversion rates are not negatively affected by the addition of research. Also, these gains are attributed to the fact that price-insensitive consumers purchase a disproportionately larger number of full-price items in the treatment groups. These results imply that price-insensitive consumers turn to cheaper items when severely reduced items are harder to find. They also show that the key effects we capture are stable under varying demand conditions, as our second experience, which included new and existing customers, was conducted more than a year after our first experience.

The rest of the document is as follows. We review the literature on online retail, research costs, and price discrimination in Section 2. We formalize our hypothesis on the role of research costs in online purchases of discounted products. Section 3. We describe our empirical framework in Section 4. Sections 5-8 explain the experimental framework and provide details on execution. We summarize our findings and suggest future directions for research in Section 9.

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