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Multiproduct pricing and the Diamond Paradox

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  • Rhodes, Andrew

Abstract

We study the pricing behavior of a multiproduct monopolist, when consumers must pay a search cost to learn its prices. Equilibrium prices are high because rational consumers understand that visiting the store exposes them to a hold-up problem. However a firm with more products attracts more consumers with low valuations, and therefore charges lower prices. We also show that when the firm advertises the price of one product, it provides consumers with some indirect information about all of its other prices. The firm can therefore build a store-wide ‘low-price image’ by advertising just one product at a low price.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32511.

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Date of creation: 08 Jul 2011
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Handle: RePEc:pra:mprapa:32511

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Keywords: multiproduct search; advertising;

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Cited by:
  1. Somekh, Babak, 2012. "The Effect Of Income Inequality On Price Dispersion," Working Papers WP2012/2, University of Haifa, Department of Economics, revised 19 Feb 2012.
  2. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer, vol. 55(1), pages 101-133, January.
  3. Zhou, Jidong, 2011. "Multiproduct search," MPRA Paper 37139, University Library of Munich, Germany.

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