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Do Consumers Search for the Highest Price? Equilibrium and Monopolistic Optimum in Differentiated Products Markets

Author

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  • Schulz, Norbert
  • Stahl, Konrad

Abstract

We develop a model of search among substitutes for the best combination of commodity variant and price, in which the structure of search costs can be manipulated by the suppliers of these variants, e.g. by joining an existing market or opening a new one. We analyse the subgame perfect equilibria arising in a multistage game involving specialized firms' choice of entry, variant and price; and compare them to a multiproduct monopolist's optimal choice. Together with the existence and uniqueness of (symmetric) equilibria we show that equilibrium prices increase in the number of substitutes sold in one market, and that a monopolist selling the same number of variants charges lower prices. The monopolist will also end up selling at least as much variety. Hence, in the situation considered here, monopoly tends to increase welfare.

Suggested Citation

  • Schulz, Norbert & Stahl, Konrad, 1995. "Do Consumers Search for the Highest Price? Equilibrium and Monopolistic Optimum in Differentiated Products Markets," CEPR Discussion Papers 1277, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1277
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    More about this item

    Keywords

    Information; Monopoly; Oligopoly; Search;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • 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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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