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Optimal Product Design: Implications for Competition and Growth under Declining Search Frictions

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  • Guido Menzio

Abstract

As search frictions become smaller in the market for a consumer product, buyers are able to locate and access more sellers per unit of time. In response, sellers choose to design varieties of the product that are more specialized in order to exploit differences in the buyers' preferences. I find mild conditions on the fundamentals under which the decline in search frictions and the increase in specialization have exactly offsetting effects on the extent of competition in the market. Under these conditions, price dispersion remains constant over time even though search frictions are vanishing. Buyer's surplus and seller's profit, however, grow at a constant endogenous rate, as the endogenous increase in specialization allows sellers to cater better and better to the heterogeneous desires of buyers.

Suggested Citation

  • Guido Menzio, 2021. "Optimal Product Design: Implications for Competition and Growth under Declining Search Frictions," NBER Working Papers 28638, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28638
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    Cited by:

    1. Menzio, Guido, 2024. "Search theory of imperfect competition with decreasing returns to scale," Journal of Economic Theory, Elsevier, vol. 218(C).
    2. Anton A. Cheremukhin & Paulina Restrepo-Echavarria & Antonella Tutino, 2023. "Marriage Market Sorting in the U.S," Working Papers 2023-023, Federal Reserve Bank of St. Louis, revised 25 Sep 2024.
    3. Jake Bradley & Axel Gottfries, 2022. "Labour market dynamics and growth," Discussion Papers 2022/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    4. Salome Baslandze & Jeremy Greenwood & Ricardo Marto & Sara Moreira, 2023. "The Expansion of Varieties in the New Age of Advertising," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 50, pages 171-210, October.
    5. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2024. "Spatial Search," IZA Discussion Papers 16824, Institute of Labor Economics (IZA).
    6. Shanyu Han & Jian Lei & Yang Liu, 2024. "Equilibrium in Style: A Modeling Framework on the Cash Flow and the Life Cycle of a Consumer Store," Papers 2404.02426, arXiv.org, revised May 2024.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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