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Search, Design and Market Structure

The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.

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Paper provided by NET Institute in its series Working Papers with number 09-17.

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Date of creation: Sep 2009
Date of revision: Sep 2009
Handle: RePEc:net:wpaper:0917
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  1. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  2. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
  3. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2010. "Information Gathering and Marketing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 375-401, 06.
  4. Catherine Tucker & Juanjuan Zhang, 2011. "How Does Popularity Information Affect Choices? A Field Experiment," Management Science, INFORMS, vol. 57(5), pages 828-842, May.
  5. repec:tpr:qjecon:v:101:y:1986:i:3:p:493-511 is not listed on IDEAS
  6. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  7. Simon P. ANDERSON & Régis RENAULT, 2008. "Comparative Advertising: disclosing horizontal match information," THEMA Working Papers 2008-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Dmitri Kuksov, 2004. "Buyer Search Costs and Endogenous Product Design," Marketing Science, INFORMS, vol. 23(4), pages 490-499, May.
  9. Nathan Larson, 2013. "Niche products, generic products, and consumer search," Economic Theory, Springer, vol. 52(2), pages 793-832, March.
  10. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  11. Gérard P. Cachon & Christian Terwiesch & Yi Xu, 2008. "On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market," Marketing Science, INFORMS, vol. 27(3), pages 461-473, 05-06.
  12. Tucker, Catherine & Zhang, Juanjuan, 2007. "Long Tail or Steep Tail? A Field Investigation into How Online Popularity Information Affects the Distribution of Customer Choices," Working papers 39811, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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