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Informational Complementarity

Author

Listed:
  • T. Tony Ke

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Song Lin

    (Department of Marketing, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong)

Abstract

Many products have similar or common attributes and are thus correlated. We show that, when these attributes are uncertain for consumers, a complementarity effect can arise among competing products in the sense that the lower price of one product may increase the demands for the others. This effect occurs when consumers sequentially search for information about both common and idiosyncratic product attributes before purchase. We characterize the optimal search strategy for the correlated search problem, provide the conditions for the existence of the complementarity effect, and show that the effect is robust under a wide range of alternative assumptions. We further explore the implications of the effect for pricing. When firms compete in price, although product correlation may weaken differentiation between the firms, the complementarity effect owing to correlated search may raise equilibrium price and profit.

Suggested Citation

  • T. Tony Ke & Song Lin, 2020. "Informational Complementarity," Management Science, INFORMS, vol. 66(8), pages 3699-3716, August.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:8:p:3699-3716
    DOI: 10.1287/mnsc.2019.3377
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    References listed on IDEAS

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