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Minimum Price Guarantees In a Consumer Search Model

Maarten Janssen and Alexei Parakhonyak
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Maarten Janssen: University of Vienna,and Erasmus University Rotterdam

No 09-089/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper is the first to examine the effect of minimum price guaranteesin a sequential search model. Minimum price guarantees are notadvertised and only known to consumers when they come to the shop.We show that in such an environment, minimum price guarantees increasethe value of buying the good and therefore increase consumers’ reservationprices. This increase is so large that even after accounting for thefact that some consumers will buy at lower prices, firms profits are largerunder minimum price guarantees than without it. We also show that anequilibrium where all firms offer minimum price guarantees does not existbecause of a free-riding problem. Minimum price guarantees can onlybe an equilibrium phenomenon in an equilibrium where firms randomizetheir decision to offer these guarantees.

Keywords: Sequential Search; Minimum Price Guarantees; Welfare Analysis (search for similar items in EconPapers)
JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
Date: 2009-10-13
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