Price-directed Consumer Search

Yucheng Ding and Tianle Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms' expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.

Keywords: Consumer search; Observable price; Search cost (search for similar items in EconPapers)
JEL-codes: D8 L1 (search for similar items in EconPapers)
Date: 2018-03-08
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (19)

Published in International Journal of Industrial Organization 58 (2018): pp. 106-135

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Journal Article: Price-directed consumer search (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:93552

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