The Opacity of Search Market: Discrete Choices with (and without) Ordered Search
Abstract: I analyze search markets where the choices of firms (e.g. prices) may or may not be observed by consumers prior to search. For individual consumer-firm pairs, the pair is transparent if the choice of the firm is known to the consumer prior to search and opaque if not. Search markets are fully transparent if all pairs are transparent, fully opaque if no pairs are transparent and partially opaque if a positive measure of pairs are transparent and a positive measure are opaque. Regardless of the opacity of a market, a demand-side equivalence between classic discrete choice and ordered search holds in equilibrium. This equivalence can be extended to the supply-side of the model in fully transparent markets because all consumers know the choices of all firms prior to search. However, a firm’s incentive to raise prices is increasing in the firm’s relative opacity to consumers. In search markets with strategic complementarities, if one or more firms face increased opacity, all equilibrium prices increase. Moreover, if an ordered search market is incorrectly modeled with the equivalent classic discrete-choice model, empirical estimates of firm profit margins and theoretical predictions of market prices correspond to the lower bound defined by full transparency. For datasets that include information about aggregate (or individual) search and selection, I outline an identification strategy that can be implemented to partially identify the underlying supply-side parameters of the search market without making assumptions about the opacity of the market.