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Minimum Price Guarantees In a Consumer Search Model

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Author Info

  • Maarten Janssen

    (University of Vienna,and Erasmus University Rotterdam)

  • Alexei Parakhonyak

    (Erasmus University Rotterdam)

Abstract

This paper is the first to examine the effect of minimum price guaranteesin a sequential search model. Minimum price guarantees are notadvertised and only known to consumers when they come to the shop.We show that in such an environment, minimum price guarantees increasethe value of buying the good and therefore increase consumers’ reservationprices. This increase is so large that even after accounting for thefact that some consumers will buy at lower prices, firms profits are largerunder minimum price guarantees than without it. We also show that anequilibrium where all firms offer minimum price guarantees does not existbecause of a free-riding problem. Minimum price guarantees can onlybe an equilibrium phenomenon in an equilibrium where firms randomizetheir decision to offer these guarantees.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-089/1.

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Date of creation: 13 Oct 2009
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Handle: RePEc:dgr:uvatin:20090089

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Web page: http://www.tinbergen.nl

Related research

Keywords: Sequential Search; Minimum Price Guarantees; Welfare Analysis;

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Cited by:
  1. Pio Baake & Ulrich Schwalbe, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Discussion Papers of DIW Berlin 1335, DIW Berlin, German Institute for Economic Research.
  2. Schwalbe, Ulrich & Baake, Pio, 2013. "Price Guarantees, Consumer Search, and Hassle Costs," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80023, Verein für Socialpolitik / German Economic Association.

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