Price-directed consumer search

Yucheng DING, Tianle ZHANG*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

1 Scopus Citations

Abstract

We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms’ expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.

Original languageEnglish
Pages (from-to)106-135
Number of pages30
JournalInternational Journal of Industrial Organization
Volume58
Early online date24 Mar 2018
DOIs
Publication statusPublished - 1 May 2018

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Profitability
Costs
Sales
Consumer search
Directed search

Keywords

  • Consumer search
  • Observable price
  • Search cost

Cite this

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title = "Price-directed consumer search",
abstract = "We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms’ expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.",
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Price-directed consumer search. / DING, Yucheng; ZHANG, Tianle.

In: International Journal of Industrial Organization, Vol. 58, 01.05.2018, p. 106-135.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AU - DING, Yucheng

AU - ZHANG, Tianle

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AB - We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms’ expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.

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