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Maximum likelihood estimation of search costs

  • Moraga-González, José Luis
  • Wildenbeest, Matthijs R.

In a recent paper Hong and Shum [2006. Using price distributions to estimate search costs. Rand Journal of Economics 37, 257-275] present a structural method to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs. Search frictions confer a significant amount of market power to the firms: Despite more than 20 firms operating in each of the markets, we estimate price-cost margins to be around 25%. The paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 5 (July)
Pages: 820-848

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Handle: RePEc:eee:eecrev:v:52:y:2008:i:5:p:820-848
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  3. Gautier, Pieter A. & Moraga-González, José L. & Wolthoff, Ronald P., 2007. "Structural Estimation of Search Intensity: Do Non-Employed Workers Search Enough?," IZA Discussion Papers 3045, Institute for the Study of Labor (IZA).
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  9. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-48, February.
  10. Donald, S.G. & Paarsch, H.J., 1992. "Maximum Likelihood Estimation in Empirical Models of Auctions," UWO Department of Economics Working Papers 9211, University of Western Ontario, Department of Economics.
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  16. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
  17. Juan Delgado & Michael Waterson, 2003. "Tyre price dispersion across retail outlets in the UK," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 491-509, December.
  18. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  19. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August.
  20. 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.
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  22. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
  23. Waterson, Michael, 2003. "The role of consumers in competition and competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 129-150, February.
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  25. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  26. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
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