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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Paper provided by NET Institute in its series Working Papers with number
08-29.
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Simon P. Anderson & Andre de Palma & Jacques-Francois Thisse, 1987.
"Demand for Differentiated Products,"
Discussion Papers
726, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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