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Measuring the effects of search costs on equilibrium prices and profits

Tiago Pires

International Journal of Industrial Organization, 2018, vol. 60, issue C, 179-205

Abstract: This paper assesses the effects of search costs on equilibrium prices and profits. Using an estimated model of demand and costs in a laundry detergent market, I find that some firms’ profits initially rise and then fall with search costs. Overall, the magnitude and direction of the search costs’ effects on prices and profits are heterogeneous. This is because search costs create conflicting incentives for a firm to reduce prices to attract the attention of searching consumers, yet also raise prices to harvest profit from consumers who are unaware of competing products. These effects can vary with the relationship between the firms’ actual prices and the consumers’ pre-search beliefs about prices.

Keywords: Search costs; Information; Consideration set; Pricing; Market performance; Discrete-choice models (search for similar items in EconPapers)
JEL-codes: D12 D43 D83 L13 L81 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:indorg:v:60:y:2018:i:c:p:179-205