Lowering consumer search costs can lead to higher prices

Abstract

We demonstrate that regulations that lower consumer search costs and make them less heterogeneous across consumers can lead to higher prices charged by firms. We estimate the distribution of consumer search costs for 366 isolated retail gasoline markets, and find that reducing the mean and standard deviation by 20% and 48%, respectively, leads to price increases in 32% of markets and an average price increase of 5.2 cents per gallon across all markets. Thus, price transparency regulation that results in higher prices may not stem from collusion, but from an equilibrium with less consumer search.