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Search-Cost-Based Market Segmentation Through Product Design

Author

Listed:
  • Max Riegel

  • Paul Wegener

Abstract

We study pricing and product design choices in a duopoly model of directed search. Product design determines both the expected valuation and the dispersion of consumers’ match values. While greater dispersion increases the option value of search, it also increases expected search duration. Consumers with lower search costs therefore benefit more from products with high dispersion than consumers with higher search costs. When firms choose product designs with different levels of dispersion, consumers sort by search cost in their initial search decisions. Firms thereby gain prominence for different consumer segments, which softens price competition. We show that, in equilibrium, firms choose maximum differentiation.

Suggested Citation

  • Max Riegel & Paul Wegener, 2024. "Search-Cost-Based Market Segmentation Through Product Design," CRC TR 224 Discussion Paper Series crctr224_2024_556v2, University of Bonn and University of Mannheim, Germany, revised Sep 2026.
    • Handle: RePEc:bon:boncrc:crctr224_2024_556v2
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp556
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    More about this item

    Keywords

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    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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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