Econometrica: Jul 2018, Volume 86, Issue 4
Consumer Search and Price Competition
Michael Choi, Anovia Yifan Dai, Kyungmin Kim
We consider an oligopoly model in which consumers engage in sequential search based on partial product information and advertised prices. By applying Weitzman's (1979) optimal sequential search solution, we derive a simple static condition that fully summarizes consumers' shopping outcomes and translates the pricing game among the sellers into a familiar discrete‐choice problem. Exploiting the discrete‐choice reformulation, we provide sufficient conditions that guarantee the existence and uniqueness of market equilibrium and analyze the effects of preference diversity and search frictions on market prices. Among other things, we show that a reduction in search costs raises market prices.
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Supplement to "Consumer Search and Price Competition"
In this supplement we provide three examples in which Hi(wi) can be explicitly calculated.