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Nonparametric Estimation of Search Costs for Differentiated Products: Evidence from Medigap

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  • Haizhen Lin
  • Matthijs R. Wildenbeest

Abstract

This article develops a method to estimate search frictions as well as preference parameters in differentiated product markets. Search costs are nonparametrically identified, which means our method can be used to estimate search costs in differentiated product markets that lack a suitable search cost shifter. We apply our model to the U.S. Medigap insurance market. We find that search costs are substantial: the estimated median cost of searching for an insurer is $30. Using the estimated parameters we find that eliminating search costs could result in price decreases of as much as $71 (or 4.7%), along with increases in average consumer welfare of up to $374.

Suggested Citation

  • Haizhen Lin & Matthijs R. Wildenbeest, 2020. "Nonparametric Estimation of Search Costs for Differentiated Products: Evidence from Medigap," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(4), pages 754-770, October.
    • Handle: RePEc:taf:jnlbes:v:38:y:2020:i:4:p:754-770
    DOI: 10.1080/07350015.2019.1573683
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    Cited by:

    1. Atayev, Atabek, 2022. "Uncertain product availability in search markets," Journal of Economic Theory, Elsevier, vol. 204(C).
    2. Atabek Atayev, 2021. "Uncertain Product Availability in Search Markets," Papers 2109.15211, arXiv.org.
    3. Atayev, Atabek, 2021. "Uncertain product availability in search markets," ZEW Discussion Papers 21-089, ZEW - Leibniz Centre for European Economic Research.

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