Tiago Pires
University of North Carolina

Abstract: This paper assesses the effects of search costs on equilibrium prices and profits. My empirical strategy uses data on purchases of laundry detergent and combines a “front-end” estimation of the demand and cost parameters with a “back-end” analysis to evaluate the effects of search costs. I find that the profits of some firms initially rise and then fall for larger search costs. The magnitude and direction of the effects of search costs on equilibrium prices and profits are heterogeneous, because search costs create incentives that work in opposite directions. My results show that the impact of search costs on prices and profits depends on the relation between actual prices and consumers’ prices beliefs.