DP11723 Firm pricing with consumer search

Author(s): Simon P Anderson, Régis Renault
Publication Date: December 2016
Keyword(s): Diamond paradox, internet, price dispersion, product differentiation, random/ordered search, Reservation rule, sequential/simultaneous search, two-sided market
JEL(s): D42, D82, D83, L11, L15, M37
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11723

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.