PRICE SEARCH IN PRODUCT MARKETS

ROBERT JOHN GIESEKE, Purdue University

Abstract

This thesis utilizes a rich data source on the purchases of grocery products by a large panel of households in a single city to provide new empirical support for predictions from the theory of search for price information. By using the theory of order statistics, Stigler showed that the expected gain from search (in terms of the savings from finding lower prices) is positive and decreases with the amount of search. In sequential search models, in which search is terminated as soon as a price is found at or below a reservation price, the same relationship is shown to hold for the expected amount of search. Existing models assume a cost of search for each item. In the search for grocery products, however, the prices of many items can be found jointly once the costs of a trip to the store have been incurred. This is called joint search. When a consumer's utility is maximized subject to the constraint of joint search, the relationship between the cost of the entire bundle of items and the expected amount of search is still the same as in the one-commodity case, but the price paid for individual items and the amount of search may have a much weaker association. These propositions are tested by regressing an index of the relative price paid on various functional forms of an index of the amount of search for grocery products. The regressions support the predictions that there are positive and diminishing returns to search in this market. In addition, the increase in the R('2) when storable and non-storable goods are combined support the prediction that the relationship between an index of prices paid and the amount of search is stronger when the index is for all goods subject to joint search than for subsets of items. The theory of the consumer trying to maximize utility, subject to both an income constraint and a time constraint on work, search and leisure, points to the simultaneous determination of quantities purchased, prices paid, and the amount of search. An empirical investigation of the influences on the amount of search should therefore utilize a simultaneous-equations model instead of the single-equation models used in the few other studies that exist. Furthermore, by relating the effects of exogenous influences on the amount of search to their influences on the quantities purchased, one can show that search for grocery products may be an increasing function of the wage rate for low-wage households, reach a maximum, and begin to decrease for still higher wages. The coefficients estimated by two-stage least squares have the predicted signs and many are statistically significant. Lower prices are shown to be associated with larger purchases. Those who make larger purchases tend to search more and hence find lower prices. In addition, single people with less time available tend to search less; the older and better educated people, who are presumably more experienced or more efficient in their use of time, search slightly more; and there is an indication of first rising and then falling amount of search as income rises, with maximum search apparently occurring above the median income level. No other study to which this one has been compared comes close to having so many significant variables associated with the amount of search by consumers in a product market.

Degree

Ph.D.

Subject Area

Economics

COinS