Results 1  10
of
30
Maximum likelihood estimation of search costs
, 2007
"... In a recent paper Hong and Shum (2006) present a structural methodology to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new method to estimate search costs by maximum likelihood. We apply our method to a data set of online prices for different c ..."
Abstract

Cited by 10 (4 self)
 Add to MetaCart
In a recent paper Hong and Shum (2006) present a structural methodology to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new method to estimate search costs by maximum likelihood. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that online consumers have either quite high or quite low search costs so they either search exhaustively in the market or very little, for at most three prices. Search frictions confer a significant amount of market power to the firms: despite that more than 20 firms operate in each of the markets we study, pricecost margins are around 25%. KolmogorovSmirnov goodnessoffit tests suggest we cannot reject the null hypothesis that the observed prices are generated by the model. The paper also illustrates how the structural methodology can be employed to simulate the effects of policy interventions.
The Dynamics of Price Dispersion or Edgeworth Variations
 Journal of Economic Dynamics and Control
, 2005
"... Computer simulations, as well as traditional and recent theory, suggest hypotheses on the dynamics of dispersed prices that we test on existing laboratory data. As predicted in some variations of the Edgeworth hypothesis, the posted price data exhibit a significant cycle. Relative to the unique stat ..."
Abstract

Cited by 8 (1 self)
 Add to MetaCart
Computer simulations, as well as traditional and recent theory, suggest hypotheses on the dynamics of dispersed prices that we test on existing laboratory data. As predicted in some variations of the Edgeworth hypothesis, the posted price data exhibit a significant cycle. Relative to the unique stationary distribution, the empirical distribution has excess mass in a price interval that moves downward over time until it approaches the lower boundary of the stationary distribution. Then the excess mass jumps upward and the downward cycle resumes. The amplitude of the cycle seems fairly constant over the longer experimental sessions. Of the simulations we consider, the one closest to Edgeworth’s 1925 account, a hybrid of gradient dynamics and logit dynamics, seems to best reproduce the observed dynamics. Acknowledgements: Financial support for the laboratory data collection was provided by the NSF under grants SBR9617917 and SBR9709874. We are also grateful to Ed Hopkins and Jörgen Weibull for helpful discussions. The second author thanks CeNDEF for sponsoring the
Using firm optimization to evaluate and estimate returns to scale," (previous title: "Estimating Returns to Scale: Critique of Popular Estimators and New Solutions to Old Problems"), working paper available at http://wwwpersonal.umich.edu/~ygorodni/ Gril
 Issues in Assessing the Contribution of Research and Development to Productivity Growth.’ The Bell Journal of Economics 10
, 2006
"... At the firm level, revenue and costs are well measured but prices and quantities are not. This paper shows that because of these data limitations estimates of returns to scale at the firm level are for the revenue function, not production function. Given this observation, the paper argues that, unde ..."
Abstract

Cited by 4 (2 self)
 Add to MetaCart
At the firm level, revenue and costs are well measured but prices and quantities are not. This paper shows that because of these data limitations estimates of returns to scale at the firm level are for the revenue function, not production function. Given this observation, the paper argues that, under weak assumptions, microlevel estimates of returns to scale are often inconsistent with profit maximization or imply implausibly large profits. The puzzle arises because popular estimators ignore heterogeneity and endogeneity in factor/product prices, assume perfect elasticity of factor supply curves or neglect the restrictions imposed by profit maximization (cost minimization) so that estimators are inconsistent or poorly identified. The paper argues that simple structural estimators can address these problems. Specifically, the paper proposes a fullinformation estimator that models the cost and the revenue functions simultaneously and accounts for unobserved heterogeneity in productivity and factor prices symmetrically. The strength of the proposed
The dynamic instability of dispersed price equilibria. Unpublished manuscript
, 2007
"... We examine whether price dispersion is an equilibrium phenomenon or a cyclical phenomenon. We develop a finite strategy model of price dispersion based on the infinite strategy model of Burdett and Judd (1983). Adopting an evolutionary standpoint, we examine the stability of dispersed price equilibr ..."
Abstract

Cited by 3 (0 self)
 Add to MetaCart
We examine whether price dispersion is an equilibrium phenomenon or a cyclical phenomenon. We develop a finite strategy model of price dispersion based on the infinite strategy model of Burdett and Judd (1983). Adopting an evolutionary standpoint, we examine the stability of dispersed price equilibrium under perturbed best response dynamics. We conclude that when both sellers and consumers participate actively in the market, all dispersed price equilibria are unstable leading us to interpret price dispersion as a cyclical process. For a particular case of the model, we prove the existence of a limit cycle. 1
The Impact of Search Costs on Consumer Behavior: A Dynamic Approach
, 2010
"... Prices for grocery items differ across stores and time because of promotion periods. Consumers therefore have an incentive to search for the lowest price. However, when a product is purchased infrequently, the effort of checking the price on every shopping trip might outweigh the benefit of spending ..."
Abstract

Cited by 3 (0 self)
 Add to MetaCart
Prices for grocery items differ across stores and time because of promotion periods. Consumers therefore have an incentive to search for the lowest price. However, when a product is purchased infrequently, the effort of checking the price on every shopping trip might outweigh the benefit of spending less. I propose a structural model for storable goods, that takes inventory holdings and search into account. The model is estimated using data on laundry detergent purchases. I find that search costs play a large role in explaining purchase behavior, with 70 percent of consumers not being aware of the price of detergent in a given time period. Therefore, from the retailers ’ point of view it is important to raise awareness of a promotion through advertising, displays, etc. I also find that price elasticities are overestimated when estimating a dynamic model without search. Incorporating imperfect information in the form of search into the model, I find that manufacturers and retailers have more market power than previously thought.
Spatial Differentiation in Retail Markets for Gasoline
, 2006
"... This paper studies an empirical model of spatial competition. The main feature of my approach is to formally specify commuting paths as the “locations” of consumers in a Hotellingtype model of spatial competition. This modeling choice is motivated by the fact that consumers are moving across the ma ..."
Abstract

Cited by 2 (0 self)
 Add to MetaCart
This paper studies an empirical model of spatial competition. The main feature of my approach is to formally specify commuting paths as the “locations” of consumers in a Hotellingtype model of spatial competition. This modeling choice is motivated by the fact that consumers are moving across the market when consuming the product. Although this feature is perhaps more relevant for gasoline markets, this also applies to most retail markets since consumers are not immobile. The consequence of this behavior is that competition is not fully localized as in the standard addressmodel. In particular, the substitution patterns between stations depend in an intuitive way on the structure of the road network and the direction of traffic flows. Another feature of the model is that consumers ’ available options are directly linked with their commuting behavior. Consumers who commute more encounter more stations, observe more prices, and therefore may pay less on average; a result observed empirically (Yatchew and No [2001]). The demandside of the model is estimated by combining a model of traffic allocation with econometric techniques used to estimate models of demand for differentiated products (Berry, Levinsohn and Pakes [1995]). The empirical distribution of commuters is computed
USING FIRM OPTIMIZATION TO EVALUATE AND ESTIMATE PRODUCTIVITY AND RETURNS TO SCALE
, 2010
"... At the firm level, revenue and costs are well measured but prices and quantities are not. This paper shows that because of these data limitations estimates of returns to scale at the firm level are for the revenue function, not production function. Given this observation, the paper argues that, unde ..."
Abstract

Cited by 2 (0 self)
 Add to MetaCart
At the firm level, revenue and costs are well measured but prices and quantities are not. This paper shows that because of these data limitations estimates of returns to scale at the firm level are for the revenue function, not production function. Given this observation, the paper argues that, under weak assumptions, microlevel estimates of returns to scale are often inconsistent with profit maximization or imply implausibly large profits. The puzzle arises because popular estimators ignore heterogeneity and endogeneity in factor/product prices, assume perfect elasticity of factor supply curves or neglect the restrictions imposed by profit maximization (cost minimization) so that estimators are inconsistent or poorly identified. The paper argues that simple structural estimators can address these problems. Specifically, the paper proposes a fullinformation estimator that models the cost and the revenue functions simultaneously and accounts for unobserved heterogeneity in productivity and factor prices symmetrically. The strength of the proposed estimator is illustrated by Monte Carlo simulations and an empirical application. Finally, the paper discusses a number of implications of estimating revenue functions rather than production functions and demonstrates that the profit share in revenue is a robust nonparametric economic diagnostic for estimates of returns to scale.
Optimal Pricing Strategy with Price Dispersion: New Evidence from the Tokyo Housing Market
"... In our multistage search model, the seller’s reservation price is affected by the offer price distribution, while the optimal asking price is chosen so as to maximize the return from search. We show that a greater dispersion in offer prices leads to a higher reservation price and a higher optimal as ..."
Abstract
 Add to MetaCart
In our multistage search model, the seller’s reservation price is affected by the offer price distribution, while the optimal asking price is chosen so as to maximize the return from search. We show that a greater dispersion in offer prices leads to a higher reservation price and a higher optimal asking price, which in turn results in a higher expected transaction price. Under the assumption that offer prices are normally distributed, a higher dispersion of offer prices also reduces time on the market for overpriced properties.
On Mergers in Consumer Search Markets ∗
, 2008
"... This paper presents a study of mergers in a consumer search market where firms sell homogeneous products. Our first result is that mergers have redistributive effects with consumers searching little getting better off at the expense of consumers who search a lot. Our second result is that the magnit ..."
Abstract
 Add to MetaCart
This paper presents a study of mergers in a consumer search market where firms sell homogeneous products. Our first result is that mergers have redistributive effects with consumers searching little getting better off at the expense of consumers who search a lot. Our second result is that the magnitude of search costs is crucial in determining the incentives of firms to merge and the welfare implications of mergers. When search costs are relatively small, mergers turn out not to be profitable for the merging firms, which shows that a “merger paradox ” can also arise under price competition. If search costs are relatively high instead, a merger causes a fall in average price and this triggers search. As a result, nonshoppers who didn’t find it worthwhile to search in the premerger situation, start searching postmerger. We show that this change in the search composition of demand may make mergers incentivecompatible for the firms and, in some cases, socially desirable.