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Beliefs and Consumer Search

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Abstract

When consumers search sequentially for prices and product matches, their beliefs of what they will encounter at the next firm are important in deciding whether or not to continue to search. In search environments where retailers have a common cost that is not known to consumers and is either the outcome of a random process or strategically set by an upstream firm, it is natural for consumers to have symmetric beliefs. We show that market outcomes under symmetric beliefs are quantitatively and qualitatively different from outcomes when consumers hold passive beliefs. Market prices are higher with symmetric beliefs (and can be as high as the joint profit maximizing prices), and are non-monotonic in the search cost. Moreover, price rigidities arise endogenously as retailers are not willing to charge prices above consumers' reservation utility. These phenomena become exacerbated in a vertical relations environment.

Suggested Citation

  • Maarten Janssen & Sandro Shelegia, 2015. "Beliefs and Consumer Search," Vienna Economics Papers vie1501, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1501
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    References listed on IDEAS

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    Cited by:

    1. Edona Reshidi, 2022. "Vertical Bargaining and Obfuscation," Staff Working Papers 22-13, Bank of Canada.
    2. Janssen, Maarten C.W. & Parakhonyak, Alexei & Parakhonyak, Anastasia, 2017. "Non-reservation price equilibria and consumer search," Journal of Economic Theory, Elsevier, vol. 172(C), pages 120-162.

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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