Consumer search and income inequality

Abstract

Competition and consumer search costs can lead to price dispersion in an oligopoly. IO research has long identified the existence of search costs and estimated their distribution and is now beginning to study which consumers sit where in the distribution. This paper argues for a view of consumer protection and competition policy that considers distributional outcomes along with efficiency. We discuss the evidence on how consumer search varies over the income distribution and provide a literature review that summarizes research on (i) the search-income gradient; (ii) mechanisms for the gradient; and (iii) how search-based price discrimination can give rise to regressive price dispersion. Through our review, we collect evidence from a wide range of industries that shows that low-income consumers tend not to search. We then draw on research from IO, marketing, finance, urban, and behavioral economics for explanations as to why this pattern persists. Finally, we conclude that IO researchers have much to offer in identifying and quantifying the distributional impacts of market power, thereby contributing to current academic and policy debates on efficiency-equity trade-offs in policy design.