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Beliefs and Consumer Search

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Abstract

When consumers search sequentially for prices and product matches, their beliefs of what they will encounter at the next rm are important in deciding whether or not to continue to search. In search environments where retailers have a common cost that is not known to consumers and is either the outcome of a random process or strategically set by an upstream rm, it is natural for consumers to have symmetric beliefs. We show that market outcomes under symmetric beliefs are quantitatively and qualitatively di erent from outcomes when consumers hold passive beliefs. Market prices are higher with symmetric beliefs (and can be as high as the joint pro t maximizing prices), and are non-monotonic in the search cost. Moreover, price rigidities arise endogenously as retailers are not willing to charge prices above consumers' reservation utility. These phenomena become exacerbated in a vertical relations environment.

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  • Maarten Janssen & Sandro Shelegia, 2015. "Beliefs and Consumer Search," Vienna Economics Papers 1501, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:1501
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    References listed on IDEAS

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    1. Maarten Janssen & Paul Pichler & Simon Weidenholzer, 2011. "Oligopolistic markets with sequential search and production cost uncertainty," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 444-470, September.
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    Cited by:

    1. Janssen, Maarten C.W. & Parakhonyak, Alexei & Parakhonyak, Anastasia, 2017. "Non-reservation price equilibria and consumer search," Journal of Economic Theory, Elsevier, vol. 172(C), pages 120-162.

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • 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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