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Can a decline in search cost increase prices?

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  • Ruth G. Gilgenbach

Abstract

This paper provides a new explanation of why a decline in consumers price search cost may not lead to lower prices. In a duopoly with price competition, I show that when some consumers are captive to one firm, there may be a non-monotonic relationship between search cost and market power; firms may charge high prices with higher probability and the average price charged may be higher when consumers price search cost falls below a critical level. Furthermore, when firms have asymmetric captive segments, expected prices charged by each firm may move in opposite directions as search cost declines.

Suggested Citation

  • Ruth G. Gilgenbach, 2015. "Can a decline in search cost increase prices?," Canadian Journal of Economics, Canadian Economics Association, vol. 48(4), pages 1381-1402, November.
    • Handle: RePEc:cje:issued:v:48:y:2015:i:4:p:1381-1402
    DOI: 10.1111/caje.12147
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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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