Multiproduct pricing and the Diamond Paradox
We study the pricing behavior of a multiproduct monopolist, when consumers must pay a search cost to learn its prices. Equilibrium prices are high because rational consumers understand that visiting the store exposes them to a hold-up problem. However a firm with more products attracts more consumers with low valuations, and therefore charges lower prices. We also show that when the firm advertises the price of one product, it provides consumers with some indirect information about all of its other prices. The firm can therefore build a store-wide ‘low-price image’ by advertising just one product at a low price.
|Date of creation:||08 Jul 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
- Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 231-242.
- Konishi, Hideo & Sandfort, Michael T., 2002.
"Expanding demand through price advertisement,"
International Journal of Industrial Organization,
Elsevier, vol. 20(7), pages 965-994, September.
- Zhou, Jidong, 2011. "Multiproduct search," MPRA Paper 37139, University Library of Munich, Germany.
- Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
- Simon P. Anderson & R�gis Renault, 2006.
American Economic Review,
American Economic Association, vol. 96(1), pages 93-113, March.
- Joel Waldfogel & Jeffrey Milyo, 1999.
"The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1081-1096, December.
- Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," Discussion Papers Series, Department of Economics, Tufts University 9807, Department of Economics, Tufts University.
- Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising and Prices: Evidence in the Wake of 44 Liquormart," NBER Working Papers 6488, National Bureau of Economic Research, Inc.
- Dudey, Marc, 1990. "Competition by Choice: The Effect of Consumer Search on Firm Location Decisions," American Economic Review, American Economic Association, vol. 80(5), pages 1092-1104, December.
- Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
- Mark Bagnoli & Ted Bergstrom, 2005.
"Log-concave probability and its applications,"
Springer, vol. 26(2), pages 445-469, 08.
- Hosken Daniel & Reiffen David, 2007. "Pricing Behavior of Multiproduct Retailers," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-45, November.
- Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
- Rey, Patrick & Chen, Zhijun, 2010.
"Loss Leading as an Exploitative Practice,"
TSE Working Papers
10-218, Toulouse School of Economics (TSE), revised Dec 2011.
- Kaufman, Phillip R. & MacDonald, James M. & Lutz, Steve M. & Smallwood, David M., 1997. "Do the Poor Pay More for Food? Item Selection and Price Differences Affect Low-Income Household Food Costs," Agricultural Economics Reports 34065, United States Department of Agriculture, Economic Research Service.
- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
- J. Miguel Villas-Boas, 2009. "Product Variety and Endogenous Pricing with Evaluation Costs," Management Science, INFORMS, vol. 55(8), pages 1338-1346, August.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price dispersion and loss leaders," Theoretical Economics, Econometric Society, vol. 3(4), December.
- Birger Wernerfelt, 1994. "Selling Formats for Search Goods," Marketing Science, INFORMS, vol. 13(3), pages 298-309.
- Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
- repec:hrv:faseco:4685158 is not listed on IDEAS
- Bester, Helmut, 1994. "Random Advertising and Monopolistic Price Dispersion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 545-59, Fall.
- Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
- McAfee R. Preston, 1995. "Multiproduct Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, vol. 67(1), pages 83-105, October.
- Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
- James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
- Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:32511. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.