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Multiproduct pricing and the Diamond Paradox

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  • Rhodes, Andrew

Abstract

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.

Suggested Citation

  • Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32511
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    File URL: https://mpra.ub.uni-muenchen.de/32511/1/MPRA_paper_32511.pdf
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    References listed on IDEAS

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    Cited by:

    1. Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 231-242.
    2. Somekh, Babak, "undated". "The Effect Of Income Inequality On Price Dispersion," Working Papers WP2012/2, University of Haifa, Department of Economics.
    3. Zhou, Jidong, 2011. "Multiproduct search," MPRA Paper 37139, University Library of Munich, Germany.
    4. 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.

    More about this item

    Keywords

    multiproduct search; advertising;

    JEL classification:

    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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