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Informational Complementarity

T. Tony Ke () and Song Lin ()
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T. Tony Ke: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142
Song Lin: Department of Marketing, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

Management Science, 2020, vol. 66, issue 8, 3699-3716

Abstract: Many products have similar or common attributes and are thus correlated. We show that, when these attributes are uncertain for consumers, a complementarity effect can arise among competing products in the sense that the lower price of one product may increase the demands for the others. This effect occurs when consumers sequentially search for information about both common and idiosyncratic product attributes before purchase. We characterize the optimal search strategy for the correlated search problem, provide the conditions for the existence of the complementarity effect, and show that the effect is robust under a wide range of alternative assumptions. We further explore the implications of the effect for pricing. When firms compete in price, although product correlation may weaken differentiation between the firms, the complementarity effect owing to correlated search may raise equilibrium price and profit.

Keywords: search theory; complementarity; bandit problems; price competition (search for similar items in EconPapers)
Date: 2020
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