Consumer Search and Price Competition

Abstract

We consider an oligopoly model in which consumers engage in sequential search based on partial product information and advertised prices. We derive a simple condition that fully summarizes consumers' shopping outcomes and use the condition to reformulate the pricing game among the sellers as a familiar discrete-choice problem. Exploiting the reformulation, we provide sufficient conditions that guarantee the existence and uniqueness of pure-strategy market equilibrium and obtain several novel insights about the effects of search frictions on market prices. Among others, we show that a reduction in search costs increases market prices, but providing more pre-search information raises market prices if and only if there are sufficiently many sellers.

Keywords: consumer search; price advertisements; online shopping; Bertrand competition; product differentiation

JEL Classification: D43, D83, L13