Price Competition and Inactive Search
46 Pages Posted: 30 Oct 2019 Last revised: 16 Jun 2021
Date Written: June 7, 2021
We propose a model of price competition in which firms select prices conditional on privately-observed production costs and a subset of consumers can choose to search sequentially given price dispersion. In the model, we investigate how competition affects the consumers’ choice of whether to purchase immediately from a randomly-selected first firm or engage in sequential search. Two types of symmetric pure-strategy equilibria, random equilibrium and searching equilibrium, are established based on the consumers’ search decision. The results show that sequential search can be completely or at least partially inactivated in the market with a sufficiently large number of competing firms.
Keywords: price dispersion, random search, sequential search, incomplete information, heterogeneous production costs, clickstream data
JEL Classification: D40, D83, L10
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