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Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model

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Simon P. Anderson ()
Regis Renault ()

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Abstract

We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the ‘‘Bertrand Paradox,’’ the ‘‘Diamond Paradox,’’ and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and hence more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap335.pdf
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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 335.

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Length: 17 pages
Date of creation: Jan 1999
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Handle: RePEc:vir:virpap:335

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  2. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 107-20, January. [Downloadable!] (restricted)
  3. Deneckere, Raymond J & Rothschild, Michael, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 361-73, April. [Downloadable!] (restricted)
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  4. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October. [Downloadable!] (restricted)
  5. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November. [Downloadable!] (restricted)
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  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  7. Wolinsky, Asher, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 53-61, January. [Downloadable!] (restricted)
  8. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-42, August.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hideo Konishi & Michael Sandfort, 2001. "Anchor Stores," Boston College Working Papers in Economics 516, Boston College Department of Economics, revised 14 Nov 2002. [Downloadable!]
    Other versions:
  2. Waterson, Michael, 2003. "Consumers and Competition," The Warwick Economics Research Paper Series (TWERPS) 679, University of Warwick, Department of Economics. [Downloadable!]
  3. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  4. Ireland, Norman & Waterson, Michael, 2006. "Cartels and Search," The Warwick Economics Research Paper Series (TWERPS) 770, University of Warwick, Department of Economics. [Downloadable!]
  5. Maarten C.W. Janssen & José Luis Moraga-González, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute. [Downloadable!]
  6. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany. [Downloadable!]
  7. Simon P. Anderson & Régis Renault, 2006. "comparative Advertising," THEMA Working Papers 2006-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  8. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  9. Jidong Zhou, 2009. "Ordered Search in Differentiated Markets," EERI Research Paper Series EERI_RP_2009_28, Economics and Econometrics Research Institute (EERI). [Downloadable!]
    Other versions:
  10. Simon P. Anderson & André de Palma, 2007. "Information Congestion: open access in a two-sided market," THEMA Working Papers 2007-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  11. Maarten C. W. Janssen & José Luis Moraga-González & Matthijs R. Wildenbeest, 2004. "A Note on Costly Sequential Search and Oligopoly Pricing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  12. Sergei Koulayev, 2008. "Estimating search with learning," Working Papers 08-29, NET Institute, revised Oct 2008. [Downloadable!]
  13. Alexandre de Cornière, 2009. "Targeted advertising with consumer search: an economic analysis of keywords advertising," PSE Working Papers 2009-48, PSE (Ecole normale supérieure). [Downloadable!]
  14. Simon P. Anderson & Régis Renault, 2002. "Advertising Content," Virginia Economics Online Papers 362, University of Virginia, Department of Economics. [Downloadable!]
    Other versions:
  15. Simon P. Anderson & André De Palma, 2008. "Information Congestion," Working Papers hal-00349516_v1, HAL. [Downloadable!]
    Other versions:
  16. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2008. "Search cost and price dispersion in vertically related markets: the case of bank loans and deposits," Banco de España Working Papers 0825, Banco de España. [Downloadable!]
  17. Christian Schultz, 2002. "Transparency and Tacit Collusion in a Differentiated Market," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  18. Haan, Marco A. & Moraga-Gonzalez, Jose L., 2009. "Advertising for attention in a consumer search model," IESE Research Papers D/794, IESE Business School. [Downloadable!]
    Other versions:
  19. Brynjolfsson, Erik & Dick, Astrid Andrea & Smith, Michael D., 2004. "Search and Product Differentiation at an Internet Shopbot," Working papers 4441-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  20. Yongmin Chen & Michael H. Riordan, 2009. "Preferences and Equilibrium in Monopoly and Duopoly," Discussion Papers 0910-03, Columbia University, Department of Economics. [Downloadable!]
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