Working papers

Sources of limited consideration and market power in e-commerce: the case of contact lenses

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The internet has allowed consumers to easily learn about competing retailers’ product offerings, and it has allowed firms to enter retail industries without establishing physical stores. Despite these conditions, which could plausibly induce high levels of consumer search effort and cut-throat price competition in retail, consumers exhibit severely limited consideration in online markets and often pay prices significantly above the minimum available one for a particular product. In this paper, I develop a model of sequential consumer search and retailer price competition to assess the roles of search costs and seller differentiation in explaining limited consideration and market power in contact lens e-commerce. My empirical framework exploits the panel nature of my data to estimate the extent of state dependence and the nature of consumers’ persistent unobserved tastes for sellers; it also features a novel approach for computing probabilities of sequential search outcomes. I find that various forms of seller differentiation are primarily responsible for limited consideration and market power in contact lens e-commerce.

Network externalities in the dating website industry

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This paper characterizes the identification of discrete choice models featuring network externalities (i.e. the dependence of consumers’ choice-specific payoffs on other consumers’ choices) and uses such a model to study consumers’ choice of dating websites. I show that a general discrete choice model in which market shares enter consumers’ utilities is not identified with only market-level data (i.e. data on product characteristics and aggegate market shares across distinct markets). This nonidentification reflects that network externalities tend to amplify or dampen the effects of product characteristics on tastes. Under certain conditions, microdata allows for the identification of the model. I proceed to estimate a model of dating website choice with network externalities, which I used to study how network externalities affect the effects of changes in market characteristics on various outcomes.

Acknowledgement

Michael Sullivan is supported in part by funding from the Social Sciences and Humanities Research Council.