Estimating Demand in Search Markets: The Case of Online Hotel Bookings

44 Pages Posted: 18 Dec 2009

See all articles by Sergei Koulayev

Sergei Koulayev

Consumer Financial Protection Bureau

Date Written: December 14, 2009

Abstract

In this paper, we emphasize that choice sets generated by a search process have two properties: first, they are limited; second, they are endogenous to preferences. Both factors lead to biased estimates in a static demand framework that takes choice sets as given. To correct for this bias, we estimate a structural model of search for differentiated products, using a unique dataset of consumer online search for hotels. Within a nested logit utility model, we show that the mean utility function and the search cost distribution of a representative consumer are non-parametrically identified, given our data. Using our model's estimates, we quantify both sources of bias: they lead to overestimation of price elasticity by a factor of five and four, respectively. The median search cost is about 38 dollars per 15 hotels; we also present some evidence on multi-modality of search cost distribution.

JEL Classification: C14, D43, D83, L13

Suggested Citation

Koulayev, Sergei, Estimating Demand in Search Markets: The Case of Online Hotel Bookings (December 14, 2009). FRB of Boston Working Paper No. 09-16. Available at SSRN: https://ssrn.com/abstract=1523926 or http://dx.doi.org/10.2139/ssrn.1523926

Sergei Koulayev (Contact Author)

Consumer Financial Protection Bureau ( email )

United States

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