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IESE Research Papers,
IESE Business School
No D/1123: Consumer Search and Prices in the Automobile Market
José L. Moraga-González (), Zsolt Sándor () and Matthijs R. Wildenbeest ()
Additional contact information
José L. Moraga-González: University of Groningen, Postal: 9712 CP Groningen, Netherlands
Zsolt Sándor: Sapientia University Miercurea Ciuc, Postal: Piaa Libertii 1, Miercurea Ciuc 530104, Rumania
Matthijs R. Wildenbeest: Indiana University, Kelley School of Business, Postal: 1275 E 10th St, Bloomington, IN 47405, United States
Abstract: In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.
Keywords: consumer search; differentiated products; demand and supply; automobiles
61 pages, March 18, 2015
Full text files
WP-1123-E.pdf
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