Consumer Search and Prices in the Automobile Market

61 Pages Posted: 16 Mar 2015

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Zsolt Sándor

Sapientia University; Sapientia-Hungarian University of Transylvania

Matthijs R. Wildenbeest

University of Arizona - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

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: automobiles, consumer search, demand and supply, differentiated products

JEL Classification: C14, D83, L13

Suggested Citation

Moraga-Gonzalez, Jose Luis and Sándor, Zsolt and Wildenbeest, Matthijs R., Consumer Search and Prices in the Automobile Market (March 2015). CEPR Discussion Paper No. DP10487, Available at SSRN: https://ssrn.com/abstract=2579237

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

Zsolt Sándor

Sapientia University ( email )

Romania

Sapientia-Hungarian University of Transylvania ( email )

Romania

Matthijs R. Wildenbeest

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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