Does Consumer Search Matter in Retail Trade?

This study investigates the relationship between consumer search costs, inflation, and firm markups in retail trade by employing actual measures of consumer search cost gathered by way of an online consumer survey. Consistent with theory, results indicate that markups can be higher if consumer search costs are higher. Results from panel data also show that increases in inflation lead to increases in markups if consumer search costs are sufficiently high. This study's focus on retail trade allows for an evaluation of two competing hypotheses on the link between inflation and markups. One side of the argument is that consumer search costs are the link whereas the other side points to long-term relationships between sellers and buyers. Long-term seller/buyer relationships are rare in retail trade, thus the finding that consumer search costs do matter in retail trade implies that long-term seller/buyer relationship are not needed to link changes in inflation to changes in firm markups. Given this study's results, it is hard to justify studying how inflation impacts firm markups (and thus social welfare) without considering consumer search costs. JEL Classification: D40, D83