Do higher search costs make the markets less competitive?

Jose Moraga-Gonzalez, Zsolt Sandor and Matthijs Wildenbeest
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Zsolt Sandor: Sapientia University Miercurea Ciuc

No 2013-08, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: We study the role of search cost heterogeneity in four models of consumer search. The models cover markets for homogeneous and differentiated goods where consumers search non-sequentially and sequentially. When search costs are sufficiently dispersed, an increase in search costs (in the sense of first-order-stochastic-dominance) has two effects. At the intensive margin, higher search costs result in less search and thereby firms have an incentive to raise their prices; however, at the extensive margin, higher search costs lowers demand, which gives firms incentives to cut their prices. Irrespective of the market setting, we find that higher search costs might result in lower equilibrium prices for all consumers. We identify one critical condition for higher search costs to result in lower prices, namely, that the search cost distribution has an decreasing elasticity with respect to the parameter that shifts the distribution. In that case, the effect of higher search costs at the extensive margin is stronger than the effect on the intensive margin. For the case where the search cost shifter enters multiplicatively, the search cost distribution having an increasing density suffices. In those situations, firms do not benefit form obfuscating search markets.Creation-Date: 2013-03

Keywords: non-sequential search; sequential search; oligopoly; search cost heterogeneity; homogeneous products; di erentiated products (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
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