Costly Search and Design
24 Pages Posted: 17 Jul 2009
Date Written: April 8, 2009
Abstract
Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.
Keywords: Product design, search costs, long tail
JEL Classification: L10, D83, M31
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Strategic Information Disclosure: The Case of Multi-Attribute Products with Heterogeneous Consumers
By V. Joseph Hotz and Mo Xiao
-
Strategic Information Disclosure: The Case of Multiattribute Products with Heterogeneous Consumers
By V. Joseph Hotz and Mo Xiao
-
Information Gathering Externalities in Product Markets
By Heski Bar-isaac, Guillermo Caruana, ...
-
Information Gathering Externalities in Product Markets
By Heski Bar-isaac, Guillermo Caruana, ...
-
Disclosing Multiple Product Attributes
By Monic Sun
-
Disclosing Multiple Product Attributes
By Monic Sun
-
Costly Information Disclosure in Oligopoly
By Insuk Cheong and Jeong-yoo Kim