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Buyer Search Costs and Endogenous Product Design

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  • Dmitri Kuksov

    (Washington University in St. Louis, One Brookings Drive, St. Louis, Missouri 63130-4899)

Abstract

Buyer search costs for price are changing in many markets. Through a model of buyer and seller behavior, I consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogenously determined in equilibrium. If firms cannot change product design, lower buyer search costs for price lead to increased price competition. However, if product design is a decision variable, lower search costs for price may also lead to higher product differentiation, which decreases price competition. In this case, the overall effect of lower buyer search costs for price may even be higher prices, lower social welfare, and higher industry profits. The result is especially interesting because recent technological changes, such as Internet shopping, can affect the market structure through lowering buyer search costs.

Suggested Citation

  • Dmitri Kuksov, 2004. "Buyer Search Costs and Endogenous Product Design," Marketing Science, INFORMS, vol. 23(4), pages 490-499, May.
    • Handle: RePEc:inm:ormksc:v:23:y:2004:i:4:p:490-499
    DOI: 10.1287/mksc.1040.0080
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    References listed on IDEAS

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