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Price-Directed Search, Product Differentiation and Competition.

Martin Obradovits1, Philipp Plaickner2

  • 1Department of Economics, University of Innsbruck, Universitätsstraße 15, 6020 Innsbruck, Austria.

Review of Industrial Organization
|October 3, 2023
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Summary
This summary is machine-generated.

In online markets, firms

Keywords:
Consumer searchMixed-strategy pricingPrice competitionPrice-directed searchProduct differentiationSearch costs

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Area of Science:

  • Economics
  • Market Competition
  • Consumer Behavior

Background:

  • Consumers in online markets can easily see prices but may need further product inspection.
  • Assessing product suitability online involves more than just price comparison.

Purpose of the Study:

  • To analyze the impact of product differentiation and search costs on market competition and outcomes.
  • To develop a tractable model of price-directed consumer search.

Main Methods:

  • Theoretical modeling of consumer search behavior.
  • Analysis of equilibrium pricing strategies.
  • Examination of welfare implications.

Main Results:

  • Equilibrium pricing by firms consistently leads to efficient consumer search.
  • Significant product differentiation can cause welfare losses due to forgone consumption.
  • Reduced search costs correlate with higher, more volatile prices, increased firm profits, and fewer sales.

Conclusions:

  • While firms' pricing may optimize search, large product differentiation can still lead to market inefficiencies.
  • Decreasing search costs paradoxically often reduces consumer surplus.
  • Market outcomes are sensitive to the interplay between search costs and product differentiation.