Going to the Discounter: Consumer Search with Local Market Heterogeneities

This article proposes a new rationale for consumer search and mixed-strategy pricing: the presence of local market heterogeneities. In the model, two spatially separated markets, each home to an identical local monopolist, differ in size and their consumers' willingness to pay (e.g., as caused by differences in local income). Consumers observe their native market's price and a flexible subset of them may travel to the other market at strictly positive cost, hoping for a bargain. I show that as long as the proportion of flexible consumers in the high-valuation market is not too large, directed search to the low-valuation market will occur in equilibrium. If the high-valuation market is relatively large in size, the opposed firm faces a commitment problem that induces non-trivial mixed-strategy pricing in equilibrium. In particular, low-valuation consumers are excluded from the product market with positive probability. Informative advertising with price-commitment may decrease market performance.