Consumer Search and Oligopolistic Pricing: a theoretical and empirical inquiry

In real world markets price information is costly to acquire. This observation has led to an important research program in economics aimed at understanding how firms compete in the presence of consumer search. In spite of the substantial amount of theoretical work on the subject, the attention this issue has received from empirical economists is rather limited. Although existing empirical work shows that market characteristics like consumer search costs, valuations and marginal costs are important in explaining firm pricing behavior in search markets, few papers exist that explicitly try to recover these market characteristics from the data. The recovery of market characteristics is of importance because successful implementation of competition policies requires explicit knowledge of underlying characteristics of the market. The purpose of this thesis is to come up with methods to estimate consumer search models, using a limited amount of data. This thesis is part of a relatively new strain of the consumer search literature that uses the structure of search models to identify and estimate search cost distributions

A Note on Costly Sequential Search and Oligopoly Pricing

We modify the paper of Stahl (1989) on sequential consumer search in an oligopoly context by relaxing the assumption that consumers obtain the first price quotation for free. When all price quotations are costly to obtain, a new equilibrium arises where consumers randomize between not searching at all and searching for one price. The region of parameters for which this equilibrium exists becomes larger as the number of shoppers decreases and/or the number of firms increases. The comparative statics properties of this new equilibrium are interesting. In particular, the expected price increases as search cost decreases, and is constant in the number of shoppers and in the number of firms. We show that the Diamond result never obtains with truly costly search

Consumer Search and Oligopolistic Pricing: An Empirical Investigation

This paper presents an empirical examination of oligopoly pricing and consumer search. The theoretical model allows for sequential and non-sequential search and using the theoretical restrictions firm and consumer behavior impose on the data we study the empirical validity of the models. Two equilibria arise: one with costless search and the other with costly search. We find that the costless search equilibrium works well for products with a relatively low value, and, by implication, a small number of sellers. By contrast, the costly search equilibrium explains the observed data in a manner that is consistent with the underlying theoretical model for almost all products (for 86 out of 87!)