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How Increasing Supplier Search Cost Can Increase Welfare

Author

Listed:
  • Zhiwen Li

    (School of management Jiangsu University - JiangSu University)

  • Michael Arnold

    (Alfred Lerner College of Business and Economics - University of Delaware [Newark])

  • Thierry Pénard

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

Reductions in search costs are generally found to increase efficiency and welfare. Using a simple search model we show that when an upstream firm incurs a search cost to identify a potential trading partner and the two parties then negotiate the wholesale price, a reduction in search cost can actually reduce welfare. Furthermore, in a market driven by seller search, a search cost of zero is never socially optimal.

Suggested Citation

  • Zhiwen Li & Michael Arnold & Thierry Pénard, 2017. "How Increasing Supplier Search Cost Can Increase Welfare," Post-Print halshs-01806502, HAL.
    • Handle: RePEc:hal:journl:halshs-01806502
    DOI: 10.1515/bejte-2016-0048
    as

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    References listed on IDEAS

    as
    1. Arnold, Michael A & Lippman, Steven A, 1998. "Posted Prices versus Bargaining in Markets with Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 450-457, July.
    2. David Lucking-Reiley & Daniel F. Spulber, 2001. "Business-to-Business Electronic Commerce," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 55-68, Winter.
    3. Arnold, Michael A & Lippman, Steven A, 1995. "Selecting a Selling Institution: Auctions versus Sequential Search," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 1-23, January.
    4. Andrei Hagiu & Bruno Jullien, 2011. "Why do intermediaries divert search?," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 337-362, June.
    5. Eugene Orlov, 2011. "How Does The Internet Influence Price Dispersion? Evidence From The Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 21-37, March.
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    Cited by:

    1. Domingo, Sonny N. & Olaguera, Ma. Divina C., 2017. "Review of High-Value Agriculture in the Philippines with Comprehensive Subsectoral Focus: Livestock Industries," Discussion Papers DP 2017-51, Philippine Institute for Development Studies.

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    More about this item

    Keywords

    Nash bargaining; sequential search; social welfare; search cost;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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