Consumer Search and Prices in the Automobile Market

61 Pages Posted: 23 May 2015

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Zsolt Sandor

University of Groningen

Matthijs R. Wildenbeest

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

Date Written: March 18, 2015

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.

Keywords: Consumer search, differentiated products, demand and supply, automobiles

JEL Classification: C14, D83, L13

Suggested Citation

Moraga-Gonzalez, Jose Luis and Sandor, Zsolt and Wildenbeest, Matthijs R., Consumer Search and Prices in the Automobile Market (March 18, 2015). IESE Business School Working Paper No. 1123-E; Kelley School of Business Research Paper No. 15-45. Available at SSRN: https://ssrn.com/abstract=2609338 or http://dx.doi.org/10.2139/ssrn.2609338

Jose Luis Moraga-Gonzalez (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

Zsolt Sandor

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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

Register to save articles to
your library

Register

Paper statistics

Downloads
131
rank
213,325
Abstract Views
586
PlumX Metrics