UCLA

I study how to measure consumer welfare changes from demand in online markets. Specifically, I find formulas for calculating exact compensating variation and equivalent variation as a function of a known demand relation. Consumers are assumed to shop for a single, discrete good. To capture online shopping behavior, I also assume consumers have limited product knowledge. That is, I assume search is costly and consumers thus optimally shop only a subcollection of all available products; I call this consumer-specific subcollection of products a ``consideration set.'' In this framework, I determine formulas to measure consumer welfare changes from price changes and from changes in search result listings. I use simulations and shopping data from an online travel agency to support my analysis.