Search-Cost-Based Market Segmentation Through Product Design

Max Riegel () and Paul Wegener ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study pricing and product design choices in a duopoly model of directed search. Product design determines both the expected valuation and the dispersion of consumers’ match values. While greater dispersion increases the option value of search, it also increases expected search duration. Consumers with lower search costs therefore benefit more from products with high dispersion than consumers with higher search costs. When firms choose product designs with different levels of dispersion, consumers sort by search cost in their initial search decisions. Firms thereby gain prominence for different consumer segments, which softens price competition. We show that, in equilibrium, firms choose maximum differentiation.

Keywords: product design; market segmentation; directed search; consumer search; search cost heterogeneity (search for similar items in EconPapers)
JEL-codes: D43 D83 L15 M31 (search for similar items in EconPapers)
Pages: 54
Date: 2024-06, Revised 2026-09
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