Measuring Product Differentiation by Observing Consumer Search

In this article, we provide a novel measure of product differentiation by observing consumer search behavior directly. We track individual consumers in a price search engine and generate a measure of distance in product space, based on goods surveyed conjointly within individual search episodes. Comparing with indices proposed in other studies, we show that our measure outperforms many of the other metrics in an application to 1642 digital cameras that differ in terms of 85 product characteristics. These differences in the product characteristics are correlated with our measure of distance to a surprisingly high degree, and prices are influenced by a large number of other adjacent products along the multi-dimensional space of product characteristics