Oligopolistic Pricing with Online Search

Abstract

We set up a game-theoretic model to examine the oligopolistic price competition, considering two features of online search: the existence of a common search ordering and shoppers who have non-positive search cost. We find that in equilibrium firms set their prices probabilistically rather than deterministically, and different firms follow different price distributions. The equilibrium pricing pattern exhibits an interesting local-competition feature, in which direct price competition occurs only between firms adjacent to each other. Further, we incorporate consumers' search strategies into the model so that both search order and stopping rules are determined rationally by consumers. We show that similar patterns may continue to hold in the fully rational framework when consumers have higher inspection costs for inferior positions.

Keywords: Pricing, Search, Oligopolistic Competition, Price Dispersion, Local Competition