Management Science (Forthcoming)
58 Pages Posted: 12 Jul 2018 Last revised: 2 Jun 2019
Date Written: December 21, 2018
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
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