Costly search and design

Bar-Isaac, Heski, Caruana, Guillermo and Cuñat, Vicente ORCID: 0000-0001-7504-2801 (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
Divisions:	Finance Management Financial Markets Group
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HF Commerce
JEL classification:	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
Date Deposited:	10 Aug 2011 13:04
Last Modified:	01 Apr 2024 07:57
URI:	http://eprints.lse.ac.uk/id/eprint/37797

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