Minimum Price Guarantees In a Consumer Search Model
AbstractThis 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-089/1.
Date of creation: 13 Oct 2009
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Web page: http://www.tinbergen.nl
Sequential Search; Minimum Price Guarantees; Welfare Analysis;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-15 (All new papers)
- NEP-COM-2010-05-15 (Industrial Competition)
- NEP-MKT-2010-05-15 (Marketing)
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