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Strategic Pricing, Consumer Search and the Number of Firms

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  • Maarten C. W. Janssen
  • José Luis Moraga-Gonz�lez
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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 2004, Wiley-Blackwell.

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    File URL: http://hdl.handle.net/10.1111/0034-6527.00315
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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Review of Economic Studies.

    Volume (Year): 71 (2004)
    Issue (Month): 4 ()
    Pages: 1089-1118

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    Handle: RePEc:oup:restud:v:71:y:2004:i:4:p:1089-1118

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    Cited by:
    1. Matthijs R Wildenbeest, 2009. "An Empirical Model of Search with Vertically Differentiated Products," Working Papers 2009-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    2. Jose Luis Moraga-Gonzalez & Zsolt Sandor & Matthijs R. Wildenbeest, 2008. "Nonparametric Estimation of the Costs of Non-Sequential Search," Tinbergen Institute Discussion Papers 07-102/1, Tinbergen Institute.
    3. Ruth G. Gilgenbach, 2009. "On Polarized Prices and Costly Sequential Search," Departmental Working Papers 0907, Southern Methodist University, Department of Economics.
    4. Lach, Saul, 2005. "Immigration and Prices," CEPR Discussion Papers 5083, C.E.P.R. Discussion Papers.
    5. Lach, Saul & Moraga-González, José-Luis, 2009. "Asymmetric Price Effects of Competition," CEPR Discussion Papers 7319, C.E.P.R. Discussion Papers.
    6. Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute.
    7. Chen, Yongmin & Zhang, Tianle, 2009. "Equilibrium price dispersion with heterogeneous searchers," MPRA Paper 16490, University Library of Munich, Germany.
    8. Sun, Ching-jen, 2005. "Dynamic Price Dispersion in a Bertrand-Edgeworth Model," MPRA Paper 9854, University Library of Munich, Germany, revised Dec 2007.

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