Costly search and design

Heski Bar-Isaac, Guillermo Caruana and Vicente Cuñat

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.

Keywords: Product design; search costs; long tail (search for similar items in EconPapers)
JEL-codes: D83 L10 M31 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1155

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