Discussion Paper Details

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Title: Firm pricing with consumer search

Author(s): Simon P Anderson and Régis Renault

Publication Date: December 2016

Keyword(s): Diamond paradox, internet, price dispersion, product differentiation, random/ordered search, Reservation rule, sequential/simultaneous search and two-sided market

Programme Area(s): Industrial Organization

Abstract: Economists could not properly capture the impact of internet on markets without a proper theory of consumer search. As a result, this theory has been rediscovered and developed further since the early 2000s. It can address such critical questions as the impact of reduced search cost on prices, variety, and product choice as well as advertising practices (such as search advertising). This theoretical development has also fed into a rich empirical literature exploiting the wealth of data that is now available regarding both consumers' and firms' online activity. The goal of this chapter is to present the basic concepts underpinning the theory of imperfectly competitive markets with consumer search. We stress that appropriate theoretical frameworks should involve sufficient heterogeneity among agents on both sides of the market. We also explain why the analysis of ordered search constitutes an essential ingredient for modeling recent search environments.

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Bibliographic Reference

Anderson, S and Renault, R. 2016. 'Firm pricing with consumer search'. London, Centre for Economic Policy Research.