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Unformatted text preview: p
p
¯
for each p ∈ [p , p ). EC 105. Industrial Organization. Fall 2011 (Matt Shum HSS, Lecture 12:Institute and price dispersion
California Search of Technology) September 9, 2011 22 / 25 Sequential search model Estimation: sequential model Observe prices p1 , . . . , pn (order in increasing order, so p = pn ).
¯
Indiﬀerence conditions, evaluated at each price, are:
(¯ − r ) ∗ (1 − G (¯)) = (pi − r ) ∗ (1 − G (pi )),
p
p i = 1, . . . , n − 1 This gives n − 1 equations, but n + 1 unknowns: G (pi ) for i = 1, . . . , n as
well as r .
Deﬁne α = 1 − G (¯): percentage of people who don’t search.
p Assume that search distribution is Gamma distribution. (Eq. (13) in paper).
Estimate model parameters (δ1 , δ2 , α, r ) by maximum likelihood (Eq. 9) EC 105. Industrial Organization. Fall 2011 (Matt Shum HSS, Lecture 12:Institute and price dispersion
California Search of Technology) September 9, 2011 23 / 25 Sequential search model Results: sequential search model
ss # Hong & Shum; art. # 2; RAND Journal of Economics vol. 37(2) 268 / THE RAND JOURNAL OF ECONOMICS TABLE 3 Estimates of SequentialSearch Model
Mediana Selling δ1 δ2 Search Cost Cost r αb Fc−1 (1 − α ; θ ) Value StokeyLucas .46 (.02) 1.55 (.03) 29.40 (1.45) 22.90 (1.31) .58 19.19 31.13 Lazear .40 (.01) 1.15 (.01) 16.37 (1.00) 11.31 (.79) .69 4.56 34.35 Billingsley .25 (.01) 2.01 (.04) 9.22 (.94) 65.37 (.83) .51 8.43 23.73 Dufﬁe .21 (.02) 4.57 (.29) 10.57 (2.01) 28.24 (1.63) .54 7.00 18.93 Product LogL Note: Including shipping and handling charges. Standard errors in parentheses. δ1 and δ2 are parameters of the gamma distribution; see
equation (13).
a As implied by estimates of the parameters of the gamma searchcost distribution.
b Proportion of consumers with reservation price equal to p , implied by estimate of r (see equation (11)). search cost for the StokeyLucas text consistent with the nonsequentialsearch model (as reported
in the bottom panel of Table 2) is roughly $2.32, whereas the corresponding number for the
sequentialsearch model (as reported in Table 3) is $29.40, over 10 times higher. Moreover, the
estimates of r , the selling costs, are uniformly lower across the four books than the corresponding
estimates in the nonsequentialsearch model.19
At ﬁrst glance, the larger searchcost magnitudes for the sequentialsearch model might
lead one to support the nonsequentialsearch model as a better descriptor of search behavior
in the markets we consider. As pointed out by Morgan and Manning (1985), nonsequential EC 105. Industrial Organization. Fall 2011 (Matt Shum HSS, Lecture 12:Institute and price dispersion
California Search of Technology) September 9, 2011 24 / 25 Sequential search model Additional empirical evidence Online book markets (redux)
Gasoline markets EC 105. Industrial Organization. Fall 2011 (Matt Shum HSS, Lecture 12:Institute and price dispersion
California Search of Technology) September 9, 2011 25 / 25...
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