An Empirical Model of Search with Vertically Differentiated Products
2011, Rand (Bell) Journal of Economics
Matthijs R. Wildenbeest
This paper presents a nonsequential search model that allows for vertical product differentiation. In the unique symmetric equilibrium firms with different characteristics draw utilities from a common utility distribution. Because the firms differ in their characteristics this leads to different price distributions. The model therefore provides a theoretical rationale for explaining price dispersion as a result of quality differences and search behavior of consumers together. Using the equilibrium conditions derived from the model, it is shown how to estimate search costs by maximum likelihood using only price data. A data set on prices from Dutch supermarkets reveals that the amount of search has decreased over the sampling period. Moreover, ignoring vertical product differentiation results in an overestimation of search costs.
Wildenbeest, Matthijs R. (2011), "An Empirical Model of Search with Vertically Differentiated Products," Rand Journal of Economics, Vol. 42, No. 4, Winter, pp. 729-757.
Winner of the 2007 EARIE Young Economist Essay Award
consumer search, oligopoly, vertical product differentiation, price dispersion, structural estimation