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Consumer Search and Prices in the Automobile Market

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Abstract

In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.

Suggested Citation

  • Moraga-González, José L. & Sándor, Zsolt & R. Wildenbeest, Matthijs, 2015. "Consumer Search and Prices in the Automobile Market," IESE Research Papers D/1123, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-1123
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    File URL: http://www.iese.edu/research/pdfs/WP-1123-E.pdf
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    1. repec:kap:qmktec:v:11:y:2013:i:2:d:10.1007_s11129-012-9126-7 is not listed on IDEAS
    2. Sergei Koulayev, 2014. "Search for differentiated products: identification and estimation," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 553-575, September.
    3. Moorthy, Sridhar & Ratchford, Brian T & Talukdar, Debabrata, 1997. " Consumer Information Search Revisited: Theory and Empirical Analysis," Journal of Consumer Research, Oxford University Press, vol. 23(4), pages 263-277, March.
    4. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, vol. 102(2), pages 1140-1160, April.
    5. Paulo Albuquerque & Bart J. Bronnenberg, 2012. "Measuring the Impact of Negative Demand Shocks on Car Dealer Networks," Marketing Science, INFORMS, vol. 31(1), pages 4-23, January.
    6. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    7. Laura Nurski & Frank Verboven, 2016. "Exclusive Dealing as a Barrier to Entry? Evidence from Automobiles," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1156-1188.
    8. 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.
    9. 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.
    10. 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.
    11. Stephan Seiler, 2013. "The impact of search costs on consumer behavior: A dynamic approach," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 155-203, June.
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    1. repec:jdm:journl:v:13:y:2018:i:5:p:484-500 is not listed on IDEAS
    2. repec:eee:indorg:v:58:y:2018:i:c:p:66-105 is not listed on IDEAS
    3. Petrikaitė, Vaiva, 2016. "Collusion with costly consumer search," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 1-10.
    4. Matsumoto, Brett & Spence, Forrest, 2016. "Price beliefs and experience: Do consumers’ beliefs converge to empirical distributions with repeated purchases?," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 243-254.
    5. De los Santos, Babur, 2018. "Consumer search on the Internet," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 66-105.

    More about this item

    Keywords

    consumer search; differentiated products; demand and supply; automobiles;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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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