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Persuasion Produces the (Diamond) Paradox

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  • Mark Whitmeyer

Abstract

This paper extends the sequential search model of Wolinsky (1986) by allowing firms to choose how much match value information to disclose to visiting consumers. This restores the Diamond paradox (Diamond 1971): there exist no symmetric equilibria in which consumers engage in active search, so consumers obtain zero surplus and firms obtain monopoly profits. Modifying the scenario to one in which prices are advertised, we discover that the no-active-search result persists, although the resulting symmetric equilibria are ones in which firms price at marginal cost.

Suggested Citation

  • Mark Whitmeyer, 2020. "Persuasion Produces the (Diamond) Paradox," Papers 2011.13900, arXiv.org, revised Apr 2021.
    • Handle: RePEc:arx:papers:2011.13900
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    File URL: http://arxiv.org/pdf/2011.13900
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    References listed on IDEAS

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    1. Jidong Zhou, 2020. "Improved Information in Search Markets," Cowles Foundation Discussion Papers 2264R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    2. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-654, May.
    3. Emir Kamenica & Matthew Gentzkow, 2011. "Bayesian Persuasion," American Economic Review, American Economic Association, vol. 101(6), pages 2590-2615, October.
    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Mark Armstrong & Jidong Zhou, 2022. "Consumer Information and the Limits to Competition," American Economic Review, American Economic Association, vol. 112(2), pages 534-577, February.
    6. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 493-511.
    7. Simon Board & Jay Lu, 2018. "Competitive Information Disclosure in Search Markets," Journal of Political Economy, University of Chicago Press, vol. 126(5), pages 1965-2010.
    8. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
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    Cited by:

    1. He, Wei & Li, Jiangtao, 2023. "Competitive information disclosure in random search markets," Games and Economic Behavior, Elsevier, vol. 140(C), pages 132-153.

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