Maximum Likelihood Estimation of Search Costs
Tinbergen Institute Discussion Paper No. 06-019/1
31 Pages Posted: 28 Feb 2006
Date Written: February 2006
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
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