Prices and Heterogeneous Search Costs

37 Pages Posted: 16 Jun 2015

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Zsolt Sándor

Sapientia University; Sapientia-Hungarian University of Transylvania

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: June 2015

Abstract

We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a symmetric Nash equilibrium exists and is unique. Search costs affect two margins - the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.

Keywords: differentiated products, monotone likelihood ratio, search cost heterogeneity, sequential search

JEL Classification: D43, D83, L13

Suggested Citation

Moraga-Gonzalez, Jose Luis and Sándor, Zsolt and Wildenbeest, Matthijs R., Prices and Heterogeneous Search Costs (June 2015). CEPR Discussion Paper No. DP10657, Available at SSRN: https://ssrn.com/abstract=2619232

Jose Luis Moraga-Gonzalez (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

Zsolt Sándor

Sapientia University ( email )

Romania

Sapientia-Hungarian University of Transylvania ( email )

Romania

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-856-5067 (Phone)
812-855-3354 (Fax)

HOME PAGE: http://www.kelley.iu.edu/mwildenb

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