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Costly search and design

Bar-Isaac, Heski, Caruana, Guillermo and Cuñat, Vicente (2008) Costly search and design. Department of economics working papers, 1153. Universitat Pompeu Fabra Department of Economics, Spain.

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Abstract

Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.

Item Type: Monograph (Working Paper)
Official URL: http://www.econ.upf.edu/
Additional Information: © 2008 Universitat Pompeu Fabra Department of Economics
Library of Congress subject classification: H Social Sciences > H Social Sciences (General)
H Social Sciences > HF Commerce
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General
M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M31 - Marketing
Sets: Research centres and groups > Managerial Economics and Strategy Group
Departments > Finance
Departments > Management
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 1153
Date Deposited: 10 Aug 2011 13:04
URL: http://eprints.lse.ac.uk/37797/

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