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Multiproduct pricing and the Diamond Paradox

  • Rhodes, Andrew

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32511.

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Date of creation: 08 Jul 2011
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Handle: RePEc:pra:mprapa:32511
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  1. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
  2. Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 231-242.
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  20. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
  21. repec:hrv:faseco:4685158 is not listed on IDEAS
  22. Bester, Helmut, 1994. "Random Advertising and Monopolistic Price Dispersion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 545-59, Fall.
  23. 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.
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  25. Weinstein, Jonathan & Ambrus, Attila, 2008. "Price Dispersion and Loss Leaders," Scholarly Articles 4589708, Harvard University Department of Economics.
  26. James D. Hess & Eitan Gerstner, 1987. "Loss Leader Pricing and Rain Check Policy," Marketing Science, INFORMS, vol. 6(4), pages 358-374.
  27. Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
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