Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings,Taxes, Advertising and Welfare

This paper studies advertising, price ceilings and taxes in a sequential search model with bilateral heterogeneities in production and search costs. We simulate equilibria using a genetic algorithm (GA) applied to over 100 market scenarios, each differing based on the number of firms, number of consumers, existence of price ceilings or taxes, costs of production, costs of advertising, consumers’ susceptibility to advertising and consumers’ search costs. We study the interaction of advertising and search and analyze the welfare effects of advertising, price ceilings and sales taxes. Despite advertising being uninformative, we find that firms charging lower prices tend to advertise more intensely and that price ceilings and advertising can improve welfare if search costs are high.