Finding a Good Deal: Stable Prices, Costly Search, and the Effect of Entry

David P. Myatt and David Ronayne
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David P. Myatt: London Business School
David Ronayne: ESMT Berlin

No 524, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study markets in which potential buyers engage in costly search to find a good deal. Our novel solution concept for prices builds upon the idea that any movement in a firm's price is followed by an opportunity for its competitors to respond with special offers. This mechanism selects the highest prices such that no firm wishes to undercut a competitor. We identify a distinctive closed-form pattern of disperse prices that uniquely satisfy our pricing solution, and pair that price profile with optimal fixed-sample search. In a stable equilibrium with active search, the intensity of search and consumer surplus are lower and industry profit is higher with more competitors. In a concentrated oligopoly, complete search in equilibrium can eliminate industry profit.

Date: 2025-01-28
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
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