Does Consumer Search Matter for Firm Markups?
This study investigates the relationship between consumer search costs, inflation, and firm markups in retail trade by employing actual measures of search cost. Consistent with theory, results indicate that markups can be higher if search costs are higher and increases in inflation lead to increases in markups if search costs are sufficiently high. Two competing hypotheses on the link between inflation and markups, namely consumer search costs and alternatively long-term seller/buyer contracts, are then evaluated. As long-term contracts are rare in retail trade, this study's results make it hard to justify studying how inflation impacts firm markups without considering search costs.