Search Costs and Risky Investment in Quality

One striking development associated with the explosion of e-commerce is the increased transparency of sellers' quality history. In this paper we analyze how this affects fi…rms' incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer's cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a fi…rm, despite its best efforts, may fail to live up to consumers' more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.search, internet search, quality, risky investment

Nonsequential Search Equilibrium with Search Cost Heterogeneity

We generalize the model of Burdett and Judd (1983) to the case where an arbitrary finite number of firms sells a homogeneous good to buyers who have heterogeneous search costs. We show that a price dispersed symmetric Nash equilibrium always exists. Numerical results show that the behavior of prices with respect to the number of firms hinges upon the shape of the search cost distribution: when search costs are relatively concentrated (dispersed), entry of firms leads to higher (lower) average prices.nonsequential search, oligopoly, arbitrary search cost distributions

Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs

We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the 2004 Medicare legislation that closed the pharmaceutical donut hole may have reduced search by the elderly, increased price dispersion, and potentially increased the average price of prescription drugs.search cost; price dispersion; prescription drugs

Advertising for attention in a consumer search model

We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs. Firms whose advertising is more salient and therefore raise attention more easily charge lower prices in equilibrium and obtain higher profits. As advertising cost asymmetries increase, aggregate profits increase, advertising falls and welfare increases.Advertising; attention; consumer search; saliency;

Job Market Signaling and Job Search

The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We show that in a signaling job market with random matching lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium.Signaling; job market; job search; separating equilibrium; unemployment; moral hazard

Consumer Search on the Internet

This paper uses consumer search data to explain search frictions in online markets, within the context of an equilibrium search model. I use a novel dataset of consumer online browsing and purchasing behavior, which tracks all consumer search prior to each transaction. Using observed search intensities from the online book industry, I estimate search cost distributions that allow for asymmetric consumer sampling. Research on consumer search often assumes a symmetric sampling rule for analytical convenience despite its lack of realism. Search behavior in the online book industry is quite limited: in only 25 percen of the transactions did consumers visit more than one bookstore's website. The industry is characterized by a strong consumer preference for certain retailers. Accounting for unequal consumer sampling halves the search cost estimates from 1.8 to 0.9 dollars per search in the online book industry. Analysis of time spent online suggests substitution between the time consumers spend searching and the relative opportunity cost of their time. Retired people, those with lower education levels, and minorities (with the exception of Hispanics) spent significantly more time searching for a book online. There is a negative relationship between income levels and time spent searching.consumer search, internet, search costs

Working Capital Requirement and the Unemployment Volatility Puzzle

Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data