Search Frictions and Market Power

• Applicant: Atabek Atayev, Ph.D.
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 565221894

By now it is commonly accepted that search costs are a crucial determinant of firms’ market power. Search costs may represent time and effort spent on finding offers. As such, these costs prevent some consumers from carefully comparing prices and buying at the cheapest firm, thus mitigating competitive pressure among firms. The topic of search frictions has become especially relevant after the rise of online markets and price-comparison websites, as—contrary to expectations—search costs have remained an important feature of these markets (see, e.g., Ellison and Ellison, 2005). For instance, consider the retail market for natural gas in Germany. As goods are fairly homogeneous, prices are the most significant factors that affect consumers’ purchase decisions. Consumers have access to price-comparison websites, which allow them to switch to a cheap provider with the help of several mouse clicks. However, few consumers search on price-comparison websites, which is suggested by 8.9% of switching rates in 2023 (Bundesnetzagentur, 2023). This is so even though cheaper options were available, which implies that firms have power in this market. Although the prevalence of such observations has led to a recent boom of literature on consumer search, important questions remain open. In this proposal, I present three research projects to study important questions on markets with search frictions. Projeçt A will study the role of information asymmetry between firms and consumers about important market factors: firms’ marginal costs of production, the number of firms, and the distribution of search costs. Project B will analyze how search costs shape firms' market power if consumers employ "general search" for prices, a search protocol that combines features of sequential and simultaneous search protocols. Project C will examine the impact of the recent subsidies on firms’ market power in Germany’s retail energy markets, which are characterized by search and switching costs. The first two projects are theoretical, and models developed within them will be used for the third empirical project. Each project will result in a high-quality research paper, which I aim to publish in leading peer-reviewed economics journals.

• DFG Programme: Research Grants
• International Connection: Austria, USA
• Co-Investigators: Professor Dr. Adrian Hillenbrand; Professor Dr. Wladislaw Mill
• Cooperation Partners: Professor Maarten Janssen, Ph.D.; Professor Matthijs Wildenbeest, Ph.D.