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Search costs in concentrated markets: An experimental analysis

Author

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  • Möllers, Claudia
  • Stühmeier, Torben
  • Wenzel, Tobias

Abstract

This paper experimentally studies the role of search cost in duopoly markets where sellers may be able to coordinate pricing decisions. We vary the level of search cost and whether sellers can communicate. While we find that consumers are more likely to invest in search when cost is reduced, we find that a reduction of search cost does not influence prices. This effect is not influenced by the availability of seller communication. Our results suggest that policy interventions that aim to increase the competitiveness of markets via reducing search cost may not be effective in concentrated markets.

Suggested Citation

  • Möllers, Claudia & Stühmeier, Torben & Wenzel, Tobias, 2016. "Search costs in concentrated markets: An experimental analysis," DICE Discussion Papers 233, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:233
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    References listed on IDEAS

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    1. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "An experimental study of price dispersion," Games and Economic Behavior, Elsevier, vol. 54(1), pages 134-158, January.
    2. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    3. Henrik Orzen, 2008. "Counterintuitive number effects in experimental oligopolies," Experimental Economics, Springer;Economic Science Association, vol. 11(4), pages 390-401, December.
    4. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 735-749.
    5. Crosetto, P. & Gaudeul, A., 2014. "Choosing whether to compete: Price and format competition with consumer confusion," Working Papers 2014-08, Grenoble Applied Economics Laboratory (GAEL).
    6. Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
    7. Harrington, Joseph E. & Hernan Gonzalez, Roberto & Kujal, Praveen, 2016. "The relative efficacy of price announcements and express communication for collusion: Experimental findings," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 251-264.
    8. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    9. David, Douglas D & Holt, Charles A, 1996. "Consumer Search Costs and Market Performance," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 133-151, January.
    10. Fonseca, Miguel A. & Normann, Hans-Theo, 2012. "Explicit vs. tacit collusion—The impact of communication in oligopoly experiments," European Economic Review, Elsevier, vol. 56(8), pages 1759-1772.
    11. Cason, Timothy N. & Datta, Shakun, 2006. "An experimental study of price dispersion in an optimal search model with advertising," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 639-665, May.
    12. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
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    Cited by:

    1. Bonnet, Céline & Schain, Jan Philip, 2017. "An empirical analysis of mergers: Efficiency gains and impact on consumer prices," DICE Discussion Papers 244, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

    More about this item

    Keywords

    Search; Collusion; Regulation;

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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