CONSUMER SEARCH COSTS AND MARKET PERFORMANCE

We conduct laboratory markets to evaluate the effects of consumer sear ch costs on market performance. The primary research goal is to assess the behavioral relevance of Diamond's [1971] paradoxical conclusion t hat the injection of a small consumer search cost alters the equilibri um price prediction from competitive to monopoly levels. Although mono poly prices are not consistently observed, we find that search costs d o tend to raise prices. Additional experimentation indicates that belo w-monopoly prices are not explained by buyer avoidance of high-pricing sellers, but that prices increase as search costs are raised.