Endogenous Availability in Search Equilibrium

Andrew Daughety and Jennifer Reinganum ()

RAND Journal of Economics, 1991, vol. 22, issue 2, 287-306

Abstract: Strategic variables (such as availability) can be used to increase customers' search costs, thus increasing the price that can be supported in equilibrium. Customers can "purchase" bargaining power by shopping at two firms and then bringing those firms into competition with one another. Knowing this, firms adjust quoted prices to keep customers from exercising this option. We compare equilibrium prices and availability, firm profits, and customer welfare under duopoly with those that would obtain under monopoly. We find that for low levels of (exogenous) customer search costs, duopolists provide lower prices and lower availability, while for high customer search costs, duopolists provide the same price but greater availability than would a monopolist.

Date: 1991
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