Maximum Likelihood Estimation of Search Costs

Tinbergen Institute Discussion Paper No. 06-019/1

31 Pages Posted: 28 Feb 2006

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Matthijs R. Wildenbeest

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

Date Written: February 2006

Abstract

In a recent paper Hong and Shum (forthcoming) present a structural methodology to estimate search cost distributions. We extend their approach to the case of oligopoly and present a maximum likelihood estimate of the search cost distribution. We apply our method to a data set of online prices for different computer memory chips. The estimates of the search cost distribution suggest that consumers have either quite high or quite low search costs so they either search for all prices in the market or for at most three prices. According to Kolmogorov-Smirnov goodness-of-fit tests, we cannot reject the null hypothesis that the observed prices are generated by the model.

Keywords: consumer search, oligopoly, price dispersion, structural estimation, maximum likelihood

JEL Classification: C14, D43, D83, L13

Suggested Citation

Moraga-Gonzalez, Jose Luis and Wildenbeest, Matthijs R., Maximum Likelihood Estimation of Search Costs (February 2006). Tinbergen Institute Discussion Paper No. 06-019/1, Available at SSRN: https://ssrn.com/abstract=885260 or http://dx.doi.org/10.2139/ssrn.885260

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

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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