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Technological Advances, Transaction Costs, and Consumer Welfare

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  • Rajeev K. Tyagi

    () (Graduate School of Management, University of California, Irvine, California 92697)

Abstract

Consumers incur many transaction costs in purchasing and using most products. This paper examines the effects of a reduction in such consumer transaction costs caused by market-level technological advances. Using a model in which consumers are simultaneously heterogeneous in their transaction costs and in their marginal valuations of product quality, this paper highlights two mechanisms that can cause such reductions in consumer transaction costs to lower consumer surplus and reduce consumer share of the total social surplus. Specifically, market-level technological advances reduce different consumers' transaction costs by different amounts and increase their reservation prices by different amounts, which can lead to: (i) product design changes that many current consumers do not like and (ii) homogenization in consumer reservation prices that allows a seller to extract more surplus through its pricing policy. This paper also shows that consumers may be better off with seller-induced higher consumer transaction costs. Finally, the paper shows how, depending on the nature of the quality production process, such reductions in consumer transaction costs can either lower or raise product qualities and consumer prices.

Suggested Citation

  • Rajeev K. Tyagi, 2004. "Technological Advances, Transaction Costs, and Consumer Welfare," Marketing Science, INFORMS, vol. 23(3), pages 335-344, January.
  • Handle: RePEc:inm:ormksc:v:23:y:2004:i:3:p:335-344
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    File URL: http://dx.doi.org/10.1287/mksc.1030.0038
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shohei Yoshida & Cong Pan, 2015. "Technology Transfer in the Market with Heterogeneous Consumers," ISER Discussion Paper 0953, Institute of Social and Economic Research, Osaka University.
    2. Sahay, Arvind, 2013. "A Customer Oriented Approach To Identifying Competitive Advantage," IIMA Working Papers WP2013-05-08, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. repec:eee:ejores:v:265:y:2018:i:3:p:1144-1158 is not listed on IDEAS
    4. Michael Lewis & Vishal Singh & Scott Fay, 2006. "An Empirical Study of the Impact of Nonlinear Shipping and Handling Fees on Purchase Incidence and Expenditure Decisions," Marketing Science, INFORMS, vol. 25(1), pages 51-64, 01-02.
    5. Bing Jing, 2006. "On the Profitability of Firms in a Differentiated Industry," Marketing Science, INFORMS, vol. 25(3), pages 248-259, 05-06.
    6. Stefan Stremersch & Peter C. Verhoef, 2005. "Globalization of Authorship in the Marketing Discipline: Does It Help or Hinder the Field?," Marketing Science, INFORMS, vol. 24(4), pages 585-594, February.
    7. Jinhong Xie & Eitan Gerstner, 2007. "Service Escape: Profiting from Customer Cancellations," Marketing Science, INFORMS, vol. 26(1), pages 18-30, 01-02.
    8. Steven M. Shugan, 2006. "—Antibusiness Movies and Folk Marketing," Marketing Science, INFORMS, vol. 25(6), pages 681-685, 11-12.
    9. Jehoshua Eliashberg & Anita Elberse & Mark A.A.M. Leenders, 2006. "The Motion Picture Industry: Critical Issues in Practice, Current Research, and New Research Directions," Marketing Science, INFORMS, vol. 25(6), pages 638-661, 11-12.

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