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Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model

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  • Simon P. Anderson
  • Regis Renault

Abstract

We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the "Bertrand Paradox," the "Diamond Paradox," and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 30 (1999)
Issue (Month): 4 (Winter)
Pages: 719-735

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Handle: RePEc:rje:randje:v:30:y:1999:i:winter:p:719-735

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  1. Anderson, S. P. & De Palma, A. & Nesterov, Y., . "Oligopolistic competition and the optimal provision of products," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1179, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  3. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  5. Simon P. Anderson & Regis Renault, 1997. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," Virginia Economics Online Papers, University of Virginia, Department of Economics 338, University of Virginia, Department of Economics.
  6. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, Elsevier, vol. 9(2), pages 93-123, October.
  7. Wolinsky, Asher, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(1), pages 53-61, January.
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