Search Costs and Diminishing Sensitivity

Empirical search cost estimates tend to increase in the size of the transaction even if search can be done conveniently online. To test whether there is a positive association between prices and search cost estimates, we conduct an online search experiment in which we manipulate the price scale while keeping the physical search effort for each price quote constant. For a sample of student subjects and for online workers at Amazon Mechanical Turk, standard search cost estimates indeed increase considerably in the price scale. To obtain scale-independent estimates, we modify the search model and allow for diminishing sensitivity, i.e., the tendency that people become less sensitive to price variations of fixed size when the price of the good increases. We find substantial degrees of diminishing sensitivity and heterogenous search costs. By combining average hourly earnings and the duration of search, we verify that the search cost estimates from the modified model capture subjects' true opportunity costs of time.​