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Costly search and design

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Author Info

  • Heski Bar-Isaac
  • Guillermo Caruana
  • Vicente Cuñat

Abstract

Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1155.

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Date of creation: Apr 2009
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Handle: RePEc:upf:upfgen:1155

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Product design; search costs; long tail;

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Cited by:
  1. Sumon Datta & K. Sudhir, 2012. "Does Reducing Spatial Differentiation Increase Product Differentiation? Effects of Zoning on Retail Entry and Format Variety," Cowles Foundation Discussion Papers 1851, Cowles Foundation for Research in Economics, Yale University, revised Sep 2012.

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