Working Paper: CEPR ID: DP10487
Authors: Jos Luis Moraga Gonz lez; Zsolt S ndor; Matthijs Wildenbeest
Abstract: In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.
Keywords: Automobiles; Consumer Search; Demand and Supply; Differentiated Products
JEL Codes: C14; D83; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher search costs (D83) | Decrease in the number of dealerships consumers visit (L81) |
| Decrease in the number of dealerships consumers visit (L81) | Affects purchasing decisions (D91) |
| Higher search costs (D83) | Lower estimates of own and cross-price elasticities (C51) |
| Higher search costs (D83) | Higher price-cost margins (D43) |
| Demographic factors (income, family size) (J11) | Mediate search behavior (D87) |
| Search costs (G19) | Affects consumer choice set (D11) |