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Consumer Search and Retail Market Structure

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  • Rhodes, Andrew
  • Zhou, Jidong

Abstract

This paper proposes a framework for studying how consumer search frictions affect retail market structure. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and value the one-stop shopping convenience associated with a multiproduct firm. We find that when the search friction is relatively large all firms are multiproduct in equilibrium. However when the search friction is smaller the equilibrium market structure is asymmetric, with single-product and multiproduct firms coexisting. This asymmetric market structure often leads to the weakest price competition, and is the worst for consumers among all possible market structures. Due to the endogeneity of market structure, a reduction in the search friction can increase market prices and decrease consumer welfare.

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  • Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:69484
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    Cited by:

    1. Patrick Legros & Konrad Stahl, 2019. "Local Search Markets and External Competition," Working Papers ECARES 2019-13, ULB -- Universite Libre de Bruxelles.
    2. Sander Heinsalu, 2020. "Greater search cost reduces prices," Papers 2004.01238, arXiv.org.
    3. Brett Hollenbeck & Renato Zaterka Giroldo, 2022. "Winning Big: Scale and Success in Retail Entrepreneurship," Marketing Science, INFORMS, vol. 41(2), pages 271-293, March.
    4. Greg Kaplan & Guido Menzio & Leena Rudanko & Nicholas Trachter, 2019. "Relative Price Dispersion: Evidence and Theory," American Economic Journal: Microeconomics, American Economic Association, vol. 11(3), pages 68-124, August.
    5. Natalia Fabra & Juan-Pablo Montero, 2022. "Product Lines and Price Discrimination in Markets with Information Frictions," Management Science, INFORMS, vol. 68(2), pages 981-1001, February.
    6. Justin P. Johnson & Andrew Rhodes, 2021. "Multiproduct mergers and quality competition," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 633-661, September.
    7. Argentesi, Elena & Buccirossi, Paolo & Cervone, Roberto & Duso, Tomaso & Marrazzo, Alessia, 2021. "The effect of mergers on variety in grocery retailing," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    8. Motta, Massimo & Peitz, Martin, 2021. "Big tech mergers," Information Economics and Policy, Elsevier, vol. 54(C).
    9. Heski Bar-Isaac & Sandro Shelegia, 2023. "Search, Showrooming, and Retailer Variety," Marketing Science, INFORMS, vol. 42(2), pages 251-270, March.
    10. Jidong Zhou, 2020. "Improved Information in Search Markets," Cowles Foundation Discussion Papers 2264R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2022.
    11. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 43276, Bruegel.
    12. Zheng, Hong & Wu, Huamin & Tian, Lin, 2022. "Healthcare service enhancement with patient search," Journal of Business Research, Elsevier, vol. 152(C), pages 398-409.
    13. Andrei Hagiu & Bruno Jullien & Julian Wright, 2020. "Creating Platforms by Hosting Rivals," Management Science, INFORMS, vol. 66(7), pages 3234-3248, July.
    14. Ramon Fauli‐Oller & Joel Sandonís, 2021. "Buyer power, product assortment and asymmetric retail formats," Bulletin of Economic Research, Wiley Blackwell, vol. 73(2), pages 196-211, April.
    15. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust [Ex-post assessment of merger control decisions in digital markets]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(5), pages 1307-1336.
    16. Niloofar Abolfathi & Simone Santamaria & Charles Williams, 2022. "How Does Firm Scope Depend on Customer Switching Costs? Evidence from Mobile Telecommunications Markets," Management Science, INFORMS, vol. 68(1), pages 316-332, January.

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    More about this item

    Keywords

    consumer search; conglomerate merger; multiproduct pricing; one-stop shopping; retail market structure;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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