Search, Design and Market Structure

Heski Bar-Isaac (), Guillermo Caruana and Vicente Cuñat ()

No 09-17, Working Papers from NET Institute

Abstract: The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.

New Economics Papers: this item is included in nep-com, nep-ict and nep-mic
Date: 2009-09, Revised 2009-09

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