Oligoply Pricing: the Effects of Search Cost Structure & Heterogeneity
It has been shown that if buyers have zero search cost and the remainder a common positive search cost, and sellers post prices, then there is a unique symmetric Nash equilibrium-sellers choose a price distribution. We show that increasing the number of search cost types results in another equilibrium, having the more realistic property that some buyers search some, but not all, sellers. It is also possible that no equilibrium exists. As the number of finite types becomes large, the equilibrium converges to the competitive price. However, if there is a continuum of types, monopoly pricing occurs. Generalizing the search environment to allow buyers to purchase price information before visiting sellers results in non-existence of an equilibrium if the cost of obtaining the information is sufficiently low. If not, then many of the above properties of equilibrium continue to hold. Price distributions are found to exist in an even wider class of settings if buyers can obtain price information before visiting sellers.
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