Estimation of preference heterogeneity in markets with costly search
File(s)
Accepted version
Author(s)
Morozov, Ilya
Seiler, Stephan
Dong, Xiaojing
Hou, Liwen
Type
Journal Article
Abstract
We study the estimation of preference heterogeneity in markets in which consumers engage in costly search to learn product characteristics. Costly search amplifies the way consumer preferences translate into purchase probabilities, generating a seemingly large degree of preference heterogeneity. We develop a search model that allows for flexible preference heterogeneity and estimate its parameters using a unique panel data set on consumers’ search and purchase behavior. The results reveal that when search costs are ignored, the model overestimates standard deviations of product intercepts by 53%. We show that the bias in heterogeneity estimates leads to incorrect inference about price elasticities and seller markups and has important consequences for personalized pricing.
Date Issued
2021-09-01
Date Acceptance
2020-11-25
Citation
Marketing Science, 2021, 40 (5), pp.871-899
ISSN
0732-2399
Publisher
Institute for Operations Research and Management Sciences
Start Page
871
End Page
899
Journal / Book Title
Marketing Science
Volume
40
Issue
5
Copyright Statement
© 2021, INFORMS
Subjects
1505 Marketing
Marketing
Publication Status
Published
Date Publish Online
2021-08-02