Search, Design and Market Structure
Rotman School of Management, University of Toronto; New York University - Leonard N. Stern School of Business - Department of Economics
Centre for Monetary and Financial Studies (CEMFI)
London School of Economics & Political Science (LSE) - Financial Markets Group; Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Universitat Pompeu Fabra - Research Centre in Financial Economics and Accounting (CREFC)
September 1, 2009
NET Institute Working Paper No. 09-17
The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.
Number of Pages in PDF File: 29
Date posted: October 4, 2009
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