Random vs. Directed Search for Scarce Resources
50 Pages Posted: 20 Dec 2018 Last revised: 16 Aug 2022
Date Written: May 14, 2019
This paper studies how ex-ante information affects consumer welfare in a search market where buyers search and match to sellers of a vertically differentiated product. In a random search market, a buyer gets no informative signal about the quality of a seller's product prior to matching, whereas in a directed search market, a buyer observes a perfectly informative signal. I derive the unique equilibrium outcome in each type of market and show that consumers are worse off in a directed search market when sellers are scarce and prices are bilaterally ex-post efficient.
Keywords: random search, directed search, consumer search, market segmentation
JEL Classification: C78, D62, D83
Suggested Citation: Suggested Citation