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Estimating search with learning

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Abstract

In this paper we estimate a structural model of search for differentiated products, using a unique dataset of individual search histories for hotels online. We propose and implement an identification strategy that allows to separately estimate consumer's beliefs, search costs and preferences. Learning plays an essential role in this strategy: it creates variation of posterior beliefs across consumers that's orthogonal to variation in search costs. We obtain two kinds of results. First, we estimate consumer's demand from the search model and compare it to results from the static model. We find that ignoring the endogeneity of choice sets leads to biased estimates: in particular, the aggregate price elasticity is over-estimated by about 80%. Second, we attempt to evaluate an empirical performance of a model of rational search. The mean search cost is estimated to be around 40 dollars, and median is 30 dollars; however, there is also a significant variation of search costs among population. A test between models of search from known (Stigler 1967) and from unknown (Rothschild 1974) distribution favors the second one: we find a statistically significant amount of Bayesian learning, even though it doesn't seem to affect demand estimates in an economically meaningful way.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-29.

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Length: 59 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:net:wpaper:0829

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Keywords: consumer search; online markets; structural estimation; maximum likelihood;

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References

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  1. Alan T. Sorensen, 2001. "An Empirical Model of Heterogeneous Consumer Search for Retail Prescription Drugs," NBER Working Papers 8548, National Bureau of Economic Research, Inc.
  2. Steven Berry & James Levinsohn & Ariel Pakes, 1993. "Automobile Prices in Market Equilibrium: Part I and II," NBER Working Papers 4264, National Bureau of Economic Research, Inc.
  3. Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics.
  4. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
  5. Jeremy T. Fox, 2007. "Semiparametric estimation of multinomial discrete-choice models using a subset of choices," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1002-1019, December.
  6. Christopher T. Conlon & Julie Holland Mortimer, 2010. "Demand Estimation Under Incomplete Product Availability," Boston College Working Papers in Economics 799, Boston College Department of Economics, revised 07 Aug 2012.
  7. Bikhchandani, Sushil & Sharma, Sunil, 1996. "Optimal search with learning," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 333-359.
  8. Wolinsky, Asher, 1987. "Matching, search, and bargaining," Journal of Economic Theory, Elsevier, vol. 42(2), pages 311-333, August.
  9. Morgan, Peter B, 1985. "Distributions of the Duration and Value of Job Search with Learning," Econometrica, Econometric Society, vol. 53(5), pages 1199-1232, September.
  10. Rosenfield, Donald B. & Shapiro, Roy D., 1981. "Optimal adaptive price search," Journal of Economic Theory, Elsevier, vol. 25(1), pages 1-20, August.
  11. Peter A. Diamond & Eric Maskin, 1979. "An Equilibrium Analysis of Search and Breach of Contract, I: Steady States," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 282-316, Spring.
  12. Moraga-González, José Luis & Wildenbeest, Matthijs R., 2008. "Maximum likelihood estimation of search costs," European Economic Review, Elsevier, vol. 52(5), pages 820-848, July.
  13. Babur De los Santos, 2008. "Consumer Search on the Internet," Working Papers 08-15, NET Institute, revised Sep 2008.
  14. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  15. Eric J. Johnson & Wendy W. Moe & Peter S. Fader & Steven Bellman & Gerald L. Lohse, 2004. "On the Depth and Dynamics of Online Search Behavior," Management Science, INFORMS, vol. 50(3), pages 299-308, March.
  16. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  17. Sailer, Katharina, 2006. "Searching and Learning in Internet Auctions: The eBay Example," Munich Dissertations in Economics 4873, University of Munich, Department of Economics.
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Cited by:
  1. Sergei Koulayev, 2009. "Estimating demand in search markets: the case of online hotel bookings," Working Papers 09-16, Federal Reserve Bank of Boston.

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