IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v55y2017icp137-165.html
   My bibliography  Save this article

Search and segregation

Author

Listed:
  • Obradovits, Martin

Abstract

Consumers’ willingness to pay for an identical product, e.g. as caused by differences in local income or tastes, may differ greatly across locations. Yet, while a large literature examines consumers’ optimal price and product-search behavior under various market configurations, the equilibrium effects of such consumer segregation remain unexplored. To this end, I study a stylized model in which two local monopolistic markets differ in size and their consumers’ willingness to pay. After observing their native market’s price, a subset of flexible consumers may travel to the other market at positive cost, hoping for a bargain. I show that as long as the proportion of flexible high-valuation consumers is not too large, active and directed search to the lower-valuation market will occur in equilibrium. If the higher-valuation market is relatively large in size, complex mixed-strategy pricing emerges in equilibrium. For regulators, increasing the fraction of flexible consumers tends to be more effective than manipulating search costs.

Suggested Citation

  • Obradovits, Martin, 2017. "Search and segregation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 137-165.
  • Handle: RePEc:eee:indorg:v:55:y:2017:i:c:p:137-165
    DOI: 10.1016/j.ijindorg.2017.09.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S016771871730440X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ijindorg.2017.09.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Daniel Hosken & David Reiffen, 2004. "Patterns of Retail Price Variation," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 128-146, Spring.
    2. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
    3. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    4. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    5. Aguirre, Inaki & Paz Espinosa, Maria, 2004. "Product differentiation with consumer arbitrage," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 219-239, February.
    6. Kyle Bagwell & Garey Ramey, 1992. "The Diamond Paradox: A Dynamic Resolution," Discussion Papers 1013, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Andrés Leal & Julio López-Laborda & Fernando Rodrigo, 2010. "Cross-Border Shopping: A Survey," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(2), pages 135-148, May.
    8. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
    9. Burdett, Ken & Smith, Eric, 2010. "Price distributions and competition," Economics Letters, Elsevier, vol. 106(3), pages 180-183, March.
    10. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    11. Kuniavsky, Sergey, 2014. "Consumer Search with Chain Stores," Discussion Papers in Economics 20799, University of Munich, Department of Economics.
    12. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-858, August.
    13. Astorne-Figari, Carmen & Yankelevich, Aleksandr, 2014. "Consumer search with asymmetric price sampling," Economics Letters, Elsevier, vol. 122(2), pages 331-333.
    14. Kuniavsky, Sergey, 2014. "Consumer Search With Chain Stores," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100468, Verein für Socialpolitik / German Economic Association.
    15. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
    16. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June.
    17. Daniel Garcia & Jun Honda & Maarten Janssen, 2017. "The Double Diamond Paradox," American Economic Journal: Microeconomics, American Economic Association, vol. 9(3), pages 63-99, August.
    18. Anderson, Simon P & Ginsburgh, Victor A, 1999. "International Pricing with Costly Consumer Arbitrage," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 126-139, February.
    19. Wright, Donald J., 1993. "Price discrimination with transportation costs and arbitrage," Economics Letters, Elsevier, vol. 41(4), pages 441-445.
    20. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    21. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
    22. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
    23. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
    24. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    25. Somekh, Babak, "undated". "The Effect Of Income Inequality On Price Dispersion," Working Papers WP2012/2, University of Haifa, Department of Economics.
    26. James R. Marchand & Mary L. Rigdon & John Roufagalas, 2000. "Third Degree Price Discrimination: A Profitable Arbitrage Case, a Note," The American Economist, Sage Publications, vol. 44(2), pages 92-94, October.
    27. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    28. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    29. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 83-105, January.
    30. Chen, Yongmin & Zhang, Tianle, 2011. "Equilibrium price dispersion with heterogeneous searchers," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 645-654.
    31. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
    32. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
    33. repec:kap:iaecre:v:16:y:2010:i:2:p:135-148 is not listed on IDEAS
    34. Andrew Rhodes, 2015. "Multiproduct Retailing," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 360-390.
    35. Obradovits, Martin, 2015. "Going to the Discounter: Consumer Search with Local Market Heterogeneities," MPRA Paper 66613, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Evangelos Rouskas, 2022. "The effects of entry in a model of sales," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2529-2544, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Obradovits, Martin, 2015. "Going to the Discounter: Consumer Search with Local Market Heterogeneities," MPRA Paper 66613, University Library of Munich, Germany.
    2. Sander Heinsalu, 2018. "Competitive pricing despite search costs if lower price signals quality," Papers 1806.00898, arXiv.org.
    3. Moraga-González, José L. & Sándor, Zsolt & Wildenbeest, Matthijs R., 2014. "Prices, Product Differentiation, And Heterogeneous Search Costs," IESE Research Papers D/1097, IESE Business School.
    4. Bruce I. Carlin & Florian Ederer, 2019. "Search Fatigue," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(3), pages 485-508, May.
    5. Rauh, Michael T., 2009. "Strategic complementarities and search market equilibrium," Games and Economic Behavior, Elsevier, vol. 66(2), pages 959-978, July.
    6. Fishman, Arthur, 2021. "Finitely repeated search and the diamond paradox," Economics Letters, Elsevier, vol. 205(C).
    7. Backus, Matthew R. & Podwol, Joseph Uri & Schneider, Henry S., 2014. "Search costs and equilibrium price dispersion in auction markets," European Economic Review, Elsevier, vol. 71(C), pages 173-192.
    8. Anania, Giovanni & Nisticò, Rosanna, 2014. "Price dispersion and seller heterogeneity in retail food markets," Food Policy, Elsevier, vol. 44(C), pages 190-201.
    9. Jun Honda, 2015. "Intermediary Search for Suppliers in Procurement Auctions," Department of Economics Working Papers wuwp203, Vienna University of Economics and Business, Department of Economics.
    10. Evangelos Rouskas, 2022. "The effects of entry in a model of sales," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2529-2544, September.
    11. Chen, Yongmin & Zhang, Tianle, 2011. "Equilibrium price dispersion with heterogeneous searchers," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 645-654.
    12. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    13. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 463-496, December.
    14. Hämäläinen, Saara, 2018. "Competitive search obfuscation," Journal of Economic Dynamics and Control, Elsevier, vol. 97(C), pages 38-63.
    15. David Ronayne, 2021. "Price Comparison Websites," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1081-1110, August.
    16. Avi Weiss & Joshua Sherman, 2014. "An Empirical Analysis of Search Costs and Price Dispersion," Working Papers 2014-06, Bar-Ilan University, Department of Economics.
    17. Natalia Fabra & Juan-Pablo Montero, 2022. "Product Lines and Price Discrimination in Markets with Information Frictions," Management Science, INFORMS, vol. 68(2), pages 981-1001, February.
    18. Donna, Javier D. & Schenone, Pablo & Veramendi, Gregory F., 2020. "Networks, frictions, and price dispersion," Games and Economic Behavior, Elsevier, vol. 124(C), pages 406-431.
    19. Glenn Ellison & Alexander Wolitzky, 2012. "A search cost model of obfuscation," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 417-441, September.
    20. Alexei Parakhonyak & Anton Sobolev, 2015. "Non‐Reservation Price Equilibrium and Search without Priors," Economic Journal, Royal Economic Society, vol. 0(584), pages 887-909, May.

    More about this item

    Keywords

    Consumer search; Segregation; Clustering; Mixed-strategy pricing; Asymmetric market structure; Active search;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:55:y:2017:i:c:p:137-165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.