Search, Design and Market Structure

29 Pages Posted: 4 Oct 2009  

Heski Bar-Isaac

University of Toronto - Rotman School of Management

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI)

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: September 1, 2009

Abstract

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.

Suggested Citation

Bar-Isaac, Heski and Caruana, Guillermo and Cuñat, Vicente, Search, Design and Market Structure (September 1, 2009). NET Institute Working Paper No. 09-17. Available at SSRN: https://ssrn.com/abstract=1481333 or http://dx.doi.org/10.2139/ssrn.1481333

Heski Bar-Isaac (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416 978 3626 (Phone)

HOME PAGE: http://https://sites.google.com/site/heskibarisaac/home

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://www.vicentecunat.com

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