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Price-Directed Search, Product Differentiation and Competition

Author

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  • Martin Obradovits

    (University of Innsbruck)

  • Philipp Plaickner

Abstract

Especially in many online markets, consumers can readily observe prices, but may need to inspect products further to assess their suitability. We study the effects of product differentiation and search costs on competition and market outcomes in a tractable model of price-directed consumer search. We find that: (i) firms’ equilibrium pricing always induces efficient search behavior; (ii) for relatively large product differentiation, welfare distortions still occur because some consumers (may) forgo consumption; and (iii) lower search costs lead to stochastically higher prices, which increases firms’ expected profits and decreases their frequency of sales. Consumer surplus often falls when search costs decrease.

Suggested Citation

  • Martin Obradovits & Philipp Plaickner, 2023. "Price-Directed Search, Product Differentiation and Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(3), pages 317-348, November.
    • Handle: RePEc:kap:revind:v:63:y:2023:i:3:d:10.1007_s11151-023-09916-y
    DOI: 10.1007/s11151-023-09916-y
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    More about this item

    Keywords

    Consumer search; Price-directed search; Product differentiation; Price competition; Mixed-strategy pricing; Search costs;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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