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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.

Suggested Citation

  • 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.
    2. Marco Pagnozzi & Salvatore Piccolo, 2012. "Vertical Separation with Private Contracts," Economic Journal, Royal Economic Society, vol. 122(559), pages 173-207, March.
    3. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
    4. Joshua Sherman & Avi Weiss, 2015. "Price Response, Asymmetric Information and Competition," Economic Journal, Royal Economic Society, vol. 125(589), pages 2077-2115, December.
    5. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    6. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    7. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
    8. Maarten Janssen & Sandro Shelegia, 2015. "Consumer Search and Double Marginalization," American Economic Review, American Economic Association, vol. 105(6), pages 1683-1710, June.
    9. Ambarish Chandra & Mariano Tappata, 2011. "Consumer search and dynamic price dispersion: an application to gasoline markets," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 681-704, December.
    10. Mariano Tappata, 2009. "Rockets and feathers: Understanding asymmetric pricing," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 673-687.
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    1. repec:eee:jetheo:v:172:y:2017:i:c:p:120-162 is not listed on IDEAS

    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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