Informational Complementarity

Management Science (Forthcoming)

MIT Sloan Research Paper No. 5510-18

58 Pages Posted: 12 Jul 2018 Last revised: 2 Jun 2019

See all articles by T. Tony Ke

T. Tony Ke

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing

Date Written: December 21, 2018

Abstract

Many products have similar or common attributes and are thus correlated. We show that when these attributes are uncertain for consumers, a complementarity effect can arise among competing products, in the sense that the lower price of one product may increase the demands for the others. This effect occurs when consumers sequentially search for information about both common and idiosyncratic product attributes prior to purchase. We characterize the optimal search strategy for the correlated search problem, provide the conditions for the existence of the complementarity effect, and show that the effect is robust under a wide range of alternative assumptions. We further explore the implications of the effect for pricing. When firms compete in price, although product correlation may weaken differentiation between the firms, the complementarity effect due to correlated search may raise equilibrium price and profit.

Keywords: search theory, information, complementarity, price competition

Suggested Citation

Ke, Tony and Lin, Song, Informational Complementarity (December 21, 2018). Management Science (Forthcoming); MIT Sloan Research Paper No. 5510-18. Available at SSRN: https://ssrn.com/abstract=3212869 or http://dx.doi.org/10.2139/ssrn.3212869

Tony Ke (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

LSK 4005, HKUST Business School
Clear Water Bay
Hong Kong, Hong Kong, China na
Hong Kong
Clear Water Bay (Fax)

HOME PAGE: http://www.bm.ust.hk/mark/staff/song_lin.html

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