Allen Head from Queen’s University will present "Consumer Search and Productivity Heterogeneity: Theory and Estimation"

Abstract: We develop and estimate a consumer search model where households trade with price setting firms that differ in productivity. Using firm-level data from Canadian retail industries, we estimate jointly the search process and productivity distribution. In the estimated model, prices fall and firm size rises with productivity, while markups either increase or follow a U-shaped relation with size—unlike models with homogeneous firms. In the estimated model, productivity heterogeneity determines the density of firms’ close competitors, affects demand elasticities and increases both price dispersion and average markups. Heterogeneity also dampens pass-through of cost shocks, amplifies that of demand shocks, and increases the sensitivity of markups to both.