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Strategic Pricing, Consumer Search and the Number of Firms

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Author Info
Maarten C. W. Janssen
José Luis Moraga-González

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Abstract

We examine an oligopoly model where some consumers engage in costly non-sequential search to discover prices. There are three distinct price-dispersed equilibria characterized by low, moderate and high search intensity. The effects of an increase in the number of firms on search behaviour, expected prices, price dispersion and welfare are sensitive (i) to the equilibrium consumers' search intensity, and (ii) to the status quo number of firms. For instance, when consumers search with low intensity, an increase in the number of firms reduces search, does not affect expected price, leads to greater price dispersion and reduces welfare. In contrast, when consumers search with high intensity, increased competition results in more search and lower prices when the number of competitors in the market is low to begin with, but in less search and higher prices when the number of competitors is large. Duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms. Copyright The Review of Economic Studies Limited, 2004.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): 4 (October)
Pages: 1089-1118
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Handle: RePEc:bla:restud:v:71:y:2004:i:4:p:1089-1118

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  1. José Luis Moraga-González & Matthijs R. Wildenbeest, 2006. "Maximum Likelihood Estimation of Search Costs," Tinbergen Institute Discussion Papers 06-019/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. Yongmin Chen & Chuan He, 2006. "Paid Placement: Advertising and Search on the Internet," Working Papers 06-02, NET Institute, revised Sep 2006. [Downloadable!]
  3. Galeotti, Andrea, 2005. "Consumers networks and search equilibria," Working Papers 1225, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
    Other versions:
  4. Michael R. Baye & John Morgan, 2005. "Brand and Price Advertising in Online Markets," Working Papers 2005-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
  5. Aurora García-Gallego & Nikolaos Georgantzís & Pedro Pereira & José C. Pernías-Cerrillo, 2007. "Bias and Size Effects of Price-Comparison Search Engines: Theory and Experimental Evidence," Working Papers 20, Portuguese Competition Authority. [Downloadable!]
  6. Michael R. Baye & John Morgan, 2005. "Probabilistic Patents," Microeconomics 0504004, EconWPA. [Downloadable!]
  7. Pieter A. Gautier & José L. Moraga-González, 2004. "Strategic Wage Setting and Coordination Frictions with Multiple Applications," Tinbergen Institute Discussion Papers 04-063/1, Tinbergen Institute, revised 16 Aug 2004. [Downloadable!]
    Other versions:
  8. Lach, Saul, 2005. "Immigration and Prices," CEPR Discussion Papers 5083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Yongmin Chen & Scott J. Savage, 2007. "The Effects Of Competition On The Price For Cable Modem Internet Access," Working Papers 07-13, NET Institute, revised Sep 2007. [Downloadable!]
  10. Maarten C.W. Janssen & Alexei Parakhonyak, 2007. "Optimal Search with Costly Recall," Tinbergen Institute Discussion Papers 08-002/1, Tinbergen Institute. [Downloadable!]
  11. Henrik Orzen, 2006. "Counterintuitive Number Effects in Experimental Oligopolies," Discussion Papers 2006-22, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  12. Maarten C.W. Janssen & José Luis Moraga-González, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute. [Downloadable!]
  13. José Luis Moraga-González & Zsolt Sándor & Matthijs R. Wildenbeest, 2008. "Nonparametric Estimation of the Costs of Non-Sequential Search," Tinbergen Institute Discussion Papers 07-102/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  14. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2006. "Clicks, Discontinuities, and Firm Demand Online," Working Papers 2006-21, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  15. Rob van der Noll, 2006. "Competition for a Prize," Tinbergen Institute Discussion Papers 06-013/1, Tinbergen Institute. [Downloadable!]
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