Search with Learning

35 Pages Posted: 18 Oct 2012 Last revised: 12 May 2014

See all articles by Babur De los Santos

Babur De los Santos

Clemson University

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: December 2013

Abstract

This paper provides a method to estimate search costs in a differentiated product environment in which consumers are uncertain about the utility distribution. Consumers learn about the utility distribution by Bayesian updating their Dirichlet process prior beliefs. The model provides expressions for bounds on the search costs that can rationalize observed search and purchasing behavior. Using individual-specific data on web browsing and purchasing behavior for MP3 players sold online we show how to use these bounds to estimate search costs as well as the parameters of the utility distribution. Our estimates indicate that search costs are sizable. We show that wrongfully assuming consumers are not learning while searching can lead to severely biased search cost and elasticity estimates.

Keywords: consumer search, learning, electronic commerce, consumer behavior

JEL Classification: D43, D83, L13

Suggested Citation

De los Santos, Babur and Hortacsu, Ali and Wildenbeest, Matthijs R., Search with Learning (December 2013). Available at SSRN: https://ssrn.com/abstract=2163369 or http://dx.doi.org/10.2139/ssrn.2163369

Babur De los Santos (Contact Author)

Clemson University ( email )

228 Sirrine Hall
Clemson, SC 29634
United States
864-656-3953 (Phone)

HOME PAGE: http://babur.people.clemson.edu

Ali Hortacsu

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-856-5067 (Phone)
812-855-3354 (Fax)

HOME PAGE: http://www.kelley.iu.edu/mwildenb

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