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Estimating demand in search markets: the case of online hotel bookings

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  • Sergei Koulayev

Abstract

In this paper, we emphasize that choice sets generated by a search process have two properties: first, they are limited; second, they are endogenous to preferences. Both factors lead to biased estimates in a static demand framework that takes choice sets as given. To correct for this bias, we estimate a structural model of search for differentiated products, using a unique dataset of consumer online search for hotels. Within a nested logit utility model, we show that the mean utility function and the search cost distribution of a representative consumer are non-parametrically identified, given our data. Using our model's estimates, we quantify both sources of bias: they lead to overestimation of price elasticity by a factor of five and four, respectively. The median search cost is about 38 dollars per 15 hotels; we also present some evidence on multi-modality of search cost distribution.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 09-16.

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Date of creation: 2009
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Handle: RePEc:fip:fedbwp:09-16

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Keywords: Consumer behavior ; Consumers' preferences ; Electronic commerce;

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Cited by:
  1. Babur De los Santos & Ali Hortacsu & Matthijs R. Wildenbeest, 2012. "Search with Learning," Working Papers 2012-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

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