Estimation of Preference Heterogeneity in Markets with Costly Search

51 Pages Posted: 17 Jul 2018 Last revised: 2 Jun 2019

See all articles by Xiaojing Dong

Xiaojing Dong

Santa Clara University - Marketing

Ilya Morozov

Stanford Graduate School of Business

Stephan Seiler

UCLA Anderson School of Management

Liwen Hou

Shanghai Jiao Tong University (SJTU)

Date Written: May 30, 2019

Abstract

We study the estimation of preference heterogeneity in markets where consumers engage in costly search to learn product characteristics. Costly search amplifies the way consumer preferences translate into purchase probabilities, generating a seemingly large degree of preference heterogeneity. We develop a search model that allows for flexible heterogeneity in preferences and estimate its parameters using a unique panel dataset on the search and purchase behavior of consumers. The estimation results reveal that when search costs are ignored, the model overestimates standard deviations of product intercepts by 66%. We show that this bias leads to incorrect inference about price elasticities and seller markups and has important consequences for targeted marketing.

Keywords: Consumer Search, Preference Heterogeneity, Choice Persistence, Importance Sampling

JEL Classification: D12, D83, M31

Suggested Citation

Dong, Xiaojing and Morozov, Ilya and Seiler, Stephan and Hou, Liwen, Estimation of Preference Heterogeneity in Markets with Costly Search (May 30, 2019). Stanford University Graduate School of Business Research Paper No. 18-34. Available at SSRN: https://ssrn.com/abstract=3202534 or http://dx.doi.org/10.2139/ssrn.3202534

Xiaojing Dong

Santa Clara University - Marketing ( email )

Santa Clara, CA 95053
United States

Ilya Morozov

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Stephan Seiler (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States

Liwen Hou

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

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