Empirical studies of consumer search and market power

Abstract

This thesis explores the interplay of search frictions and market power. In the first essay, we study how prices are negotiated between consumers and firms. In the electricity market that we study, with competitive retailers, fixed and variable charges vary widely across consumers. We implement an audit study to identify the sources of price dispersion. We create a call centre staffed by actors that call real call centres to obtain rates for fictitious consumers with experimentally-assigned combinations of consumer characteristics. We find that of offline search leads to larger discounts than online search. Firms reduce their profit margins by 30% for call-in consumers who are informed about and who negotiate using low reference prices. We also document cross-sectional price discrimination between new consumers in a market and existing consumers. Holding price informedness and other consumer characteristics fixed, firms are less willing to negotiate lower prices with new arrivals than with existing clients of rival firms.

My second essay investigates the impact of a mandatory information disclosure policy on market competition in the retail gasoline context. Information disclosure policies enhance search and are implemented with the aims of increasing demand elasticities and creating competition. However, if price transparency also makes it easier for firms to monitor their rivals’ behaviour, this raises concerns about tacit collusion. As such, the equilibrium impact on competition depends on which effect dominates. My study shows that the price disclosure policy leads to margin-enhancing effects in small regional markets. Digging deeper, I find that these margin-enhancing effects are directly associated with an equilibrium price transition, where a dominant firm uses price leadership to communicate their intention to transit from a price cycle equilibrium to a more profitable fixed price equilibrium. This transition, which occurred immediately after the information disclosure policy was introduced, suggests that firms were potentially using the platform to coordinate with each other.

The final essay investigates how consumer search on price transparency platforms varies across socio-economic groups. In recent years, there has been a push for demand-side policies that aim to help consumers, especially disadvantaged households, make more informed decisions. However, it is not well-known who these initiatives benefit most. Therefore, this essay investigates how users on a price transparency platform who belong to different socio-economic backgrounds respond to changes in price dispersion. In the context of retail gasoline, my analysis reveals heterogeneous search responses to changes in price dispersion across socio-economic groups. In particular, I find that users who get the most value from search relative to income, such as the most vulnerable households, are least engaged in search.