Estimation of Sequential Search Model

71 Pages Posted: 21 Jul 2018 Last revised: 9 May 2019

See all articles by Jae Hyen Chung

Jae Hyen Chung

University of Chicago, Booth School of Business

Pradeep K. Chintagunta

University of Chicago

Sanjog Misra

University of Chicago - Booth School of Business

Date Written: May 6, 2019

Abstract

We propose a new likelihood-based estimation method for the sequential search model. By allowing search costs to be heterogeneous across consumers and products, we can directly compute the joint probability of the search sequence and the purchase decision when consumers are searching for the idiosyncratic preference shocks in their utility functions. Under this procedure, one recursively makes random draws for each dimension that requires numerical integration to simulate the probabilities associated with the purchase decision and the search sequence under the sequential search algorithm. We then present details from an extensive simulation study that compares the proposed approach with existing estimation methods recently used for sequential search model estimation, viz., the kernel-smoothed frequency simulator (KSFS) and the crude frequency simulator (CFS). In the empirical application, we apply the proposed method to the Expedia dataset from Kaggle which has previously been analyzed using the KSFS estimator and the assumption of homogeneous search costs. We demonstrate that the proposed method has a better predictive performance associated with differences in the estimated effects of various drivers of clicks and purchases, and highlight the importance of the heterogeneous search costs assumption even when KSFS is used to estimate the sequential search model. Lastly, from a managerial perspective, we show that sorting products by their expected utilities can enhance consumer welfare and increase the number of transactions.

Keywords: Consumer Search, Sequential Search

JEL Classification: M31

Suggested Citation

Chung, Jae Hyen and Chintagunta, Pradeep K. and Misra, Sanjog, Estimation of Sequential Search Model (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3203973 or http://dx.doi.org/10.2139/ssrn.3203973

Jae Hyen Chung (Contact Author)

University of Chicago, Booth School of Business ( email )

Chicago, IL
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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