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Search, Design and Market Structure

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  • Heski Bar-Isaac

    ()
    (Stern School of Business, NYU)

  • Guillermo Caruana

    ()
    (CEMFI)

  • Vicente Cuñat

    ()
    (London School of Economics)

Abstract

The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 09-17.

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Date of creation: Sep 2009
Date of revision: Sep 2009
Handle: RePEc:net:wpaper:0917

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  1. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  2. Gérard P. Cachon & Christian Terwiesch & Yi Xu, 2008. "On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market," Marketing Science, INFORMS, vol. 27(3), pages 461-473, 05-06.
  3. Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics.
  4. Renault, Régis & Anderson, Simon P., 2009. "Comparative advertising: disclosing horizontal match information," Economics Papers from University Paris Dauphine 123456789/12478, Paris Dauphine University.
  5. Catherine Tucker & Juanjuan Zhang, 2011. "How Does Popularity Information Affect Choices? A Field Experiment," Management Science, INFORMS, vol. 57(5), pages 828-842, May.
  6. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2010. "Information Gathering and Marketing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 375-401, 06.
  7. Nathan Larson, 2013. "Niche products, generic products, and consumer search," Economic Theory, Springer, vol. 52(2), pages 793-832, March.
  8. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  9. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  10. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  11. Tucker, Catherine & Zhang, Juanjuan, 2007. "Long Tail or Steep Tail? A Field Investigation into How Online Popularity Information Affects the Distribution of Customer Choices," Working papers 39811, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Dmitri Kuksov, 2004. "Buyer Search Costs and Endogenous Product Design," Marketing Science, INFORMS, vol. 23(4), pages 490-499, May.
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Cited by:
  1. Renault, Régis, 2014. "Platform contents," Economics Papers from University Paris Dauphine 123456789/12808, Paris Dauphine University.
  2. Wang, Chengsi, 2011. "Informative Advertising, Consumer Search and Transparency Policy," MPRA Paper 34977, University Library of Munich, Germany.
  3. Arthur Fishman & Nadav Levy, 2011. "Search Costs and Risky Investment in Quality," Working Papers 2011-04, Department of Economics, Bar-Ilan University.
  4. Fershtman, Chaim & Fishman, Arthur & Zhou, Jidong, 2013. "Search and Categorization," MPRA Paper 53166, University Library of Munich, Germany.
  5. Chen, Yongmin & Zhang, Tianle, 2013. "Entry and Welfare in Search Markets," MPRA Paper 52241, University Library of Munich, Germany.

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