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Conditioning prices on search behaviour

Author

Listed:
  • Armstrong, Mark
  • Zhou, Jidong

Abstract

We consider a market in which firms can partially observe each consumer's search behavior in the market. In our main model, a firm knows whether a consumer is visiting it for the first time or whether she is returning after a previous visit. Firms have an incentive to offer a lower price on a first visit than a return visit, so that new consumers are offered a "buy-now" discount. The ability to offer such discounts acts to raise all prices in the market. If firms cannot commit to their buy-later price, in many cases firms make "exploding" offers, and consumers never return to a previously sampled firm. Likewise, if firms must charge the same price to all consumers, regardless of search history, we show that they sometimes have the incentive to make exploding offers. We also consider other ways in which firms could use information about search behaviour to determine their prices.

Suggested Citation

  • Armstrong, Mark & Zhou, Jidong, 2010. "Conditioning prices on search behaviour," MPRA Paper 19985, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19985
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    File URL: https://mpra.ub.uni-muenchen.de/19985/1/MPRA_paper_19985.pdf
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    Citations

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    Cited by:

    1. Armstrong, Mark & Zhou, Jidong, 2010. "Exploding offers and buy-now discounts," MPRA Paper 22531, University Library of Munich, Germany.
    2. Alexei Parakhonyak & Anton Sobolev, 2015. "Non‐Reservation Price Equilibrium and Search without Priors," Economic Journal, Royal Economic Society, vol. 0(584), pages 887-909, May.
    3. Ş. Akın & Brennan Platt, 2014. "A theory of search with deadlines and uncertain recall," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 101-133, January.
    4. Huck, Steffen & Weizsäcker, Georg, 2015. "Markets for leaked information," Discussion Papers, Research Unit: Economics of Change SP II 2015-305, Social Science Research Center Berlin (WZB).
    5. Maarten C.W. Janssen & Alexei Parakhonyak, 2011. "Consumer Search Markets with Costly Second Visits," Vienna Economics Papers 1102, University of Vienna, Department of Economics.
    6. Huck, Steffen & Schmid, Julia & Wallace, Brian, 2013. "Price framing," Discussion Papers, Research Unit: Economics of Change SP II 2013-314, Social Science Research Center Berlin (WZB).

    More about this item

    Keywords

    Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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