Estimation of Preference Heterogeneity in Markets with Costly Search

Ilya Morozov (), Stephan Seiler (), Xiaojing Dong () and Liwen Hou ()
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Ilya Morozov: Northwestern University, Evanston, Illinois 60208
Stephan Seiler: Imperial College London, London SW7 2BU, United Kingdom; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom
Xiaojing Dong: Santa Clara University, Santa Clara, California 95053
Liwen Hou: Shanghai Jiao Tong University, 200240 Shanghai, China

Marketing Science, 2021, vol. 40, issue 5, 871-899

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.

Keywords: consumer search; preference heterogeneity; choice persistence; importance sampling (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:40:y:2021:i:5:p:871-899

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