CONSUMER SEARCH COSTS AND MARKET PERFORMANCE

Abstract

We conduct laboratory markets to evaluate the effects of consumer search costs on market performance. The primary research goal is to assess the behavioral relevance of Diamond's [1971] paradoxical conclusion that the injection of a small consumer search cost alters the equilibrium price prediction from competitive to monopoly levels. Although monopoly prices are not consistently observed, we find that search costs do tend to raise prices. Additional experimentation indicates that below‐monopoly prices are not explained by buyer avoidance of high‐pricing sellers, but that prices increase as search costs are raised.