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Prices and Heterogeneous Search Costs

Moraga-González, José-Luis, Matthijs Wildenbeest and Sándor, Zsolt
Authors registered in the RePEc Author Service: Jose Luis Moraga-Gonzalez

No 10657, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a 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. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.

Keywords: Differentiated products; Monotone likelihood ratio; Search cost heterogeneity; Sequential search (search for similar items in EconPapers)
JEL-codes: D43 D83 L13 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-com and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Prices and heterogeneous search costs (2017) Downloads
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