Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Mar, 2023, Volume 91, Issue 2

Optimal Product Design: Implications for Competition and Growth under Declining Search Frictions

https://doi.org/10.3982/ECTA19653
p. 605-639

Guido Menzio

As search frictions in the market for a consumer product decline, buyers are able to locate and access more and more sellers. In response, sellers choose to design varieties of the product that are more and more specialized in order to take advantage of the heterogeneity in buyers' preferences. I find conditions on the fundamentals of the market under which the increase in specialization exactly offsets the decline in search frictions. Under these conditions, the extent of competition and the extent of price dispersion remain constant over time even though search frictions are vanishing. Buyer's surplus and seller's profit, however, grow over time at a constant endogenous rate, as the increase in specialization allows sellers to cater better and better to the preferences of individual buyers.


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Supplemental Material

Supplement to "Optimal Product Design: Implications for Competition and Growth under Declining Search Frictions"

Guido Menzio

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