Switching to a new product or service can cost consumers time and money. In economists' jargon, these are known as ‘search and switching costs’. Economics professor José Luis Moraga-González says search and switching costs help businesses keep their prices artificially high. Moraga-González has been awarded a prestigious Marie Curie Excellence Grant from the European Union, a grant of EUR 1.2m for research into how competition authorities can mitigate market power in these types of market.
Identical products and services from different firms often have different price tags. That may seem strange at first sight; rational consumers would be expected to choose the cheapest alternative every time. In reality, though, they don’t and this gives firms market power. The companies with the high-end prices benefit, while consumers and society at large lose out. Search and switching costs, Moraga-González’s speciality, play a crucial role in this.
‘In an ideal market, all parties would have free and complete access to information and decisions would also be costless, says Moraga-González. ‘In the real world, however, that Platonic ideal is just a dream. Switching to another bank costs money, and finding out which power or telephone company offers the best rates takes time.’ He is trying to get to grips with ‘unobservable’ market processes: ‘It is difficult to put your finger on precisely what drives consumers. What we are able to do is to work backwards from the range of prices in a market to consumer characteristics’. Moraga-González and his colleagues designed models to do this, and then tested them in practical situations. A recent study of the price differences between twenty distributors of a popular memory chip showed that the model where over a third of consumers compared all prices, while another third bought the product at the first available distributor, best matched the observed price spread.
Moraga-González: ‘That reveals a dichotomy between consumers who are very busy and literally cannot justify incurring the search costs, and those who have the time to make price comparisons’. The research can be applied to concrete situations: ‘If you know the pattern of consumer search costs – in this case it is U-shaped – that knowledge can be used for policymaking purposes. There is an optimum number of companies in a market for every consumer distribution of search costs so competition authorities can take this into account when assessing mergers. In addition, the research shows that websites with price comparisons have a useful role to play, and that rational assessments often lie behind what at first sight may appear to be irrational consumer behaviour’.
The Marie Curie Excellence Grant was instituted by the European Union to give promising scientists greater freedom in their research. The award is almost EUR 1.2m, for four years’ research. José Luis Moraga-González ( Spain , 1969), who previously worked at the Erasmus University and the Tinbergen Institute in Rotterdam , has been Professor of Economics at the RUG since 2005. He is associated with the Energy Delta Research Centre.
Contact details: J.L. Moraga-González, Faculty of Economics, tel. +31(0)50 363 4697, e-mail: firstname.lastname@example.org
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