Quantifying Search and Switching Costs in the U.S. Auto Insurance Industry

Abstract

I estimate demand for auto insurance in the presence of two types of market frictions: search and switching costs. I develop an integrated utility-maximizing model in which consumers decide over which and how many companies to search and from which company to purchase. My modeling approach rationalizes observed consideration sets as being the outcomes of consumers’ search processes. I find search costs to range from $35 to $170 and average switching costs of $40. Search costs are the most important driver of customer retention and their elimination is the main lever to increase consumer welfare in the auto insurance industry.

Keywords: consumer search, simultaneous search, switching costs, auto insurance industry

JEL Classification: D43, D83, G22, L13, L89