An empirical model of search with vertically differentiated products

This article provides a framework for studying price dispersion in markets with product differentiation and search frictions. We show under which assumptions we can obtain an equilibrium in which vertically differentiated firms mix prices over different supports. The model can explain the frequently changing prices reported in several empirical studies, but also why some firms have persistently higher prices than others. We show how to estimate the model by maximum likelihood using only prices. Estimates for grocery items in the United Kingdom reveal that most of the observed price variation is explained by supermarket heterogeneity rather than search frictions, whereas the estimated amount of search is low.