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Search and segregation

Martin Obradovits ()

International Journal of Industrial Organization, 2017, vol. 55, issue C, 137-165

Abstract: Consumers’ willingness to pay for an identical product, e.g. as caused by differences in local income or tastes, may differ greatly across locations. Yet, while a large literature examines consumers’ optimal price and product-search behavior under various market configurations, the equilibrium effects of such consumer segregation remain unexplored. To this end, I study a stylized model in which two local monopolistic markets differ in size and their consumers’ willingness to pay. After observing their native market’s price, a subset of flexible consumers may travel to the other market at positive cost, hoping for a bargain. I show that as long as the proportion of flexible high-valuation consumers is not too large, active and directed search to the lower-valuation market will occur in equilibrium. If the higher-valuation market is relatively large in size, complex mixed-strategy pricing emerges in equilibrium. For regulators, increasing the fraction of flexible consumers tends to be more effective than manipulating search costs.

Keywords: Consumer search; Segregation; Clustering; Mixed-strategy pricing; Asymmetric market structure; Active search (search for similar items in EconPapers)
JEL-codes: D43 D83 L11 L13 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:indorg:v:55:y:2017:i:c:p:137-165