Consumer Search and Retail Market Structure
44 Pages Posted: 12 Feb 2016
Date Written: February 10, 2016
This paper proposes a framework for studying how consumer search frictions affect retail market structure. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and value the one-stop shopping convenience associated with a multiproduct firm. We find that when the search friction is relatively large all firms are multiproduct in equilibrium. However when the search friction is smaller the equilibrium market structure is asymmetric, with single-product and multiproduct firms coexisting. This asymmetric market structure often leads to the weakest price competition, and is the worst for consumers among all possible market structures. Due to the endogeneity of market structure, a reduction in the search friction can increase market prices and decrease consumer welfare.
Keywords: consumer search, conglomerate merger, multiproduct pricing, one-stop shopping, retail market structure
JEL Classification: D11, D43, D83, L13
Suggested Citation: Suggested Citation