DP14521 Search, Information and Prices

Author(s): Dirk Bergemann, Benjamin A Brooks, Stephen Morris
Publication Date: March 2020
Keyword(s): "Law of One Price", Bayes correlated equilibrium, Bertrand Competition, information structure, price competition, Price Count, Price Quote, search
JEL(s): D41, D42, D43, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14521

Consider a market with many identical firms offering a homogeneous good. A consumer obtains price quotes from a subset of firms and buys from the firm offering the lowest price. The "price count" is the number of firms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we obtain a tight upper bound (under first-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of firms' common-prior higher-order beliefs about the price count, including the extreme cases of complete information (firms know the price count exactly) and no information (firms only know the ex ante distribution of the price count). A qualitative implication of our results is that even a small ex ante probability that the price count is one can lead to dramatic increases in the expected price. The bound also applies in a wide class of models where the price count distribution is endogenized, including models of simultaneous and sequential consumer search.