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Oligopolistic Pricing with Online Search

Journal of Management Information Systems, Vol. 27, No. 3, pp. 111-141, 2011

McCombs Research Paper Series IROM-03-10

41 Pages Posted: 11 Apr 2010 Last revised: 27 Oct 2015

Lizhen Xu

Georgia Institute of Technology - Scheller College of Business

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: May 5, 2009

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

Suggested Citation

Xu, Lizhen and Chen, Jianqing and Whinston, Andrew B., Oligopolistic Pricing with Online Search (May 5, 2009). Journal of Management Information Systems, Vol. 27, No. 3, pp. 111-141, 2011; McCombs Research Paper Series IROM-03-10. Available at SSRN: https://ssrn.com/abstract=1587549

Lizhen Xu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

United States
404-894-4380 (Phone)
404-894-6030 (Fax)

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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