Seminar_Jose Luis Moraga-Gonzales.

Titel: Maximum Likelihood Estimation of Search Costs.

Abstract: In a recent paper Hong and Shum (2006) present a structural

methodology to estimate search cost distributions. We extend their

approach to the case of oligopoly and present a new method to estimate

search costs by maximum likelihood. We apply our method to a data set of

online prices for different computer memory chips. The estimates suggest

that on-line consumers have either quite high or quite low search costs

so they either search exhaustively in the market or very little, for at

most three prices. Search frictions confer a significant amount of

market power to the firms: despite that more than 20 firms operate in

each of the markets we study, price-cost margins are around 25\%.

Kolmogorov-Smirnov goodness-of-fit tests suggest we cannot reject the

null hypothesis that the observed prices are generated by the model. The

paper also illustrates how the structural methodology can be employed to

simulate the effects of policy interventions.