40 Pages Posted: 2 Aug 2004
Date Written: May 5, 2004
Almost all of the literature on search markets is based on the assumption that search is random. However, in real life, consumer search is hardly ever random. This paper presents an ordered search model that, in contrast to random search models, yields intuitively appealing equilibria in which there is price dispersion; prices decline in the order of search; the equilibrium price distribution depends on the distribution of search costs; and consumers with lower search costs search longer and obtain better deals. The welfare implications and feasibility of different search technologies are discussed, and it is shown how a search order can arise endogenously in a positioning game played by firms.
Keywords: Non-Random Search, Price Dispersion, Diamond Paradox, Positioning Game, Intermediary
JEL Classification: D43, L13, M3
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