Prices and heterogeneous search costs

Prices and heterogeneous search costs

We study price formation in a model of consumer search for differentiated products in which consumers have heterogeneous search costs. We provide conditions under which a pure-strategy symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or se...

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Bibliographic Details
Published in:The Rand journal of economics Vol. 48; no. 1; pp. 125 - 146
Main Authors: Moraga-González, José Luis, Sándor, Zsolt, Wildenbeest, Matthijs R.
Format: Journal Article
Language:English
Published: Santa Monica Wiley Subscription Services, Inc 01-03-2017
Rand Corporation
Subjects:
Behavioral decision theory
Consumer behavior
Consumer behaviour
Consumer equilibrium
Consumer prices
Corporations
Cost allocation
Cost analysis
Costs
Economic costs
Elasticity of demand
Equilibrium prices
Game theory
Market prices
Prices
Product differentiation
Studies
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Summary:We study price formation in a model of consumer search for differentiated products in which consumers have heterogeneous search costs. We provide conditions under which a pure-strategy symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density.
Bibliography:Earlier versions of this article were circulated under the title “Do higher search costs make markets less competitive?” We would like to thank the Editor, Mark Armstrong, and two anonymous referees for their helpful comments. Simon Anderson, Guillermo Caruana, Alex de Cornière, Andrea Galeotti, Knut‐Eric Joslin, Silvana Krasteva, Theo Dijkstra, Dmitry Lubensky, Andras Niedermayer, Marielle Non, Vaiva Petrikaitė, Régis Renault, Mariano Tappata, Makoto Watanabe, and Jidong Zhou are also thanked for their useful remarks. Special thanks go to Paulo K. Monteiro for his comments, help, and useful references. The article has also benefited from presentations at Antwerpen, Bologna, Carlos III, CEMFI, Copenhagen, CPB, East Anglia, EUI, Mannheim, Oxford, PSE, Sauder Business School, the Fifth Workshop on Search and Switching Costs (Bloomington, IN), the IIOC 2014 (Chicago), the 2014 MaCCI Workshop on Consumer Search in Bad Homburg, the SaM 2015 Workshop at Bristol, the SED 2015 (Warsaw), the EARIE 2015 (Munich), and the 4th WIPE (University Rovira i Virgili). Financial support from the Marie Curie Excellence Grant MEXT‐CT‐2006‐042471, grant ECO2011‐29533 of the Spanish Ministry of Economy and Competitiveness, and grant PN‐II‐ID‐PCE‐2012‐4‐0066 of the Romanian Ministry of National Education, CNCS‐UEFISCDI, is gratefully acknowledged. Moraga‐González is also affiliated with the CEPR, the Tinbergen Institute, CESifo, and the Public‐Private Sector Research Center (IESE, Barcelona).
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ISSN:0741-6261
1756-2171
DOI:10.1111/1756-2171.12170