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Paying for prominence

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  • Armstrong, Mark
  • Zhou, Jidong

Abstract

We investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options. First, firms can affect an intermediary's sales efforts by means of commission payments. When firms pay commission to a salesman, the salesman promotes the product with the highest commission, and steers ignorant consumers towards the more expensive product. Second, sellers can advertise prices on a price comparison website, so that consumers investigate the suitability of products in order of increasing price. In such a market, equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs. Finally, consumers might first consider their existing supplier when they purchase a new product, which suggests a relatively benign rationale for the prevalence of cross-selling in markets such as retail banking.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30529.

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Date of creation: 27 Apr 2011
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Handle: RePEc:pra:mprapa:30529

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Keywords: Consumer search; e-commerce; price comparison websites; cross-selling; mis-selling; commission sales.;

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References

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  5. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2005. "Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords," NBER Working Papers 11765, National Bureau of Economic Research, Inc.
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  7. Chris M. Wilson, 2008. "Ordered Search and Equilibrium Obfuscation," Economics Series Working Papers 401, University of Oxford, Department of Economics.
  8. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  9. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  10. 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.
  11. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  12. Zhou, Jidong, 2009. "Ordered Search in Differentiated Markets," MPRA Paper 13397, University Library of Munich, Germany.
  13. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2006. "Clicks, Discontinuities, and Firm Demand Online," Working Papers 2006-21, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  14. Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
  15. Marco A. Haan & José L. Moraga‐González, 2011. "Advertising for Attention in a Consumer Search Model," Economic Journal, Royal Economic Society, vol. 121(552), pages 552-579, 05.
  16. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics.
  17. Varian, Hal R., 2007. "Position auctions," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1163-1178, December.
  18. Maria Arbatskaya, 2007. "Ordered search," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 119-126, 03.
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Citations

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Cited by:
  1. Moraga-González, José-Luis & Petrikaite, Vaiva, 2013. "Search Costs, Demand-Side Economies and the Incentives to Merge under Bertrand Competition," CEPR Discussion Papers 9374, C.E.P.R. Discussion Papers.
  2. Hunold, Matthias & Muthers, Johannes, 2012. "Resale price maintenance and manufacturer competition for retail services," ZEW Discussion Papers 12-028, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Fershtman, Chaim & Fishman, Arthur & Zhou, Jidong, 2013. "Search and Categorization," MPRA Paper 53166, University Library of Munich, Germany.
  4. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528 - 583.
  5. repec:dgr:uvatin:2012017 is not listed on IDEAS
  6. Wonsuk Chung & Rick Harbaugh, 2012. "Biased Recommendations," Working Papers 2012-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  7. Gu, Yiquan & Wenzel, Tobias, 2012. "Strategic obfuscation and consumer protection policy in financial markets: Theory and experimental evidence," DICE Discussion Papers 76, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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