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Consumer Search Costs and Preferences on the Internet

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  • Grégory Jolivet

    ()

  • Hélène Turon

    ()

Abstract

We analyse consumers’ search and purchase decisions on an Internet platform. Using a rich dataset on all adverts posted and transactions made on a major French Internet platform (PriceMinister), we show evidence of substantial price dispersion among adverts for the same product. We also show that consumers do not necessarily choose the cheapest advert available and sometimes even choose an advert that is dominated in price and non-price characteristics (such as seller’s reputation) by another available advert. To explain the transactions observed on the platform, we derive and estimate a structural model of sequential directed search where consumers observe all advert prices but have to pay a search cost to see the other advert characteristics. We allow for flexible heterogeneity in consumers’ preferences and search costs. After deriving tractable identification conditions for our model, we estimate sets of parameters that can rationalize each transaction. Our model can predict a wide range of consumer search strategies and fits almost all transactions observed in our sample. We find empirical evidence of heterogenous, sometimes positive and substantially large search costs and marginal willingness to pay for advert hedonic characteristics.

Suggested Citation

  • Grégory Jolivet & Hélène Turon, 2014. "Consumer Search Costs and Preferences on the Internet," Bristol Economics Discussion Papers 14/647, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:14/647
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp14647.pdf
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    References listed on IDEAS

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    1. Sam Cosaert & Thomas Demuynck, 2015. "Revealed preference theory for finite choice sets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(1), pages 169-200, May.
    2. Ali Hortaçsu & 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, Oxford University Press, vol. 119(2), pages 403-456.
    3. Laurens Cherchye & Ian Crawford & Bram De Rock & Frederic Vermeulen, 2009. "The revealed preference approach to demand," ULB Institutional Repository 2013/132522, ULB -- Universite Libre de Bruxelles.
    4. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, June.
    5. Babur De Los Santos & Ali Hortacsu & Matthijs R. Wildenbeest, 2012. "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior," American Economic Review, American Economic Association, vol. 102(6), pages 2955-2980, October.
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    More about this item

    Keywords

    Consumer Search; Revealed Preferences; Individual Heterogeneity; Price Dispersion; Internet.;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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