Consumer Search and Oligopolistic Pricing: An Empirical Investigation
34 Pages Posted: 27 Oct 2004
Date Written: October 2004
This paper presents an empirical examination of oligopoly pricing and consumer search. The theoretical model allows for sequential and non-sequential search and, using the theoretical restrictions firm and consumer behavior impose on the data, we study the empirical validity of the models. Two equilibria arise: one with costless search and the other with costly search. We find that the costless search equilibrium works well for products with a relatively low value, and, by implication, a small number of sellers. By contrast, the costly search equilibrium explains the observed data in a manner that is consistent with the underlying theoretical model for almost all products (for 86 out of 87!).
Keywords: consumer search, oligopoly, price dispersion, maximum likelihood estimation
JEL Classification: C13, D40, D83, L13
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