Search and Collusion in Electronic Markets

We examine the impact of reduced search costs on prices of commodity products in electronic marketplaces. Conventionally, reduced consumer search costs may be expected to engender stronger price competition between firms, resulting in lower prices and improved consumer welfare. This notion was formalized in Stahl (1989, "Oligopolistic pricing with sequential consumer search," American Economic Review, Vol. 79, No. 4, pp. 700--712) in a model of static firm competition. In this paper, we show that these standard welfare conclusions may be neutralized or reversed in a dynamic environment. We focus on self-enforcing collusion by firms and characterize the conditions under which collusive equilibria exist. We show that less costly consumer search can facilitate firms' abilities to collude, resulting in higher prices and reduced consumer welfare, even with imperfect or no monitoring by sellers of each other's prices. If the same technology that eases consumer search also allows firms to monitor each other's prices more easily, then firms can more easily detect cheating on a collusive price arrangement, allowing an even greater scope for collusion. This raises antitrust concerns with respect to the electronic marketplace and suggests that at least some of the anticipated competitive gains from electronic market systems may be difficult to realize.