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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
Summary
In online markets, firms
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.
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