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Discussion Paper Details

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Title: Do Consumers Search for the Highest Price? Equilibrium and Monopolistic Optimum in Differentiated Products Markets

Author(s): Norbert Schulz and Konrad O Stahl

Publication Date: November 1995

Keyword(s): Information, Monopoly, Oligopoly and Search

Programme Area(s): Industrial Organization

Abstract: We develop a model of search among substitutes for the best combination of commodity variant and price, in which the structure of search costs can be manipulated by the suppliers of these variants, e.g. by joining an existing market or opening a new one. We analyse the subgame perfect equilibria arising in a multistage game involving specialized firms' choice of entry, variant and price; and compare them to a multiproduct monopolist's optimal choice. Together with the existence and uniqueness of (symmetric) equilibria we show that equilibrium prices increase in the number of substitutes sold in one market, and that a monopolist selling the same number of variants charges lower prices. The monopolist will also end up selling at least as much variety. Hence, in the situation considered here, monopoly tends to increase welfare.

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Bibliographic Reference

Schulz, N and Stahl, K. 1995. 'Do Consumers Search for the Highest Price? Equilibrium and Monopolistic Optimum in Differentiated Products Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1277