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Price-directed Consumer Search

Author

Listed:
  • Ding, Yucheng
  • Zhang, Tianle
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.

Suggested Citation

  • Ding, Yucheng & Zhang, Tianle, 2018. "Price-directed Consumer Search," MPRA Paper 93552, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93552
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    References listed on IDEAS

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    Cited by:

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    2. Martin Obradovits & Philipp Plaickner, 2023. "Price-Directed Search, Product Differentiation and Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(3), pages 317-348, November.
    3. Pak Hung Au & Mark Whitmeyer, 2021. "Attraction Versus Persuasion," HKUST CEP Working Papers Series 202102, HKUST Center for Economic Policy.
    4. Haan, Marco A. & Heijnen, Pim & Obradovits, Martin, 2023. "Competition with list prices," Games and Economic Behavior, Elsevier, vol. 140(C), pages 502-528.
    5. Haan, Marco A. & Moraga-González, José L. & Petrikaitė, Vaiva, 2018. "A model of directed consumer search," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 223-255.
    6. José L. Moraga-González & Makoto Watanabe & José Luis Moraga Gonzalez, 2023. "Price Equilibrium with Selling Constraints," CESifo Working Paper Series 10583, CESifo.
    7. Moraga-González, José-Luis & Watanabe, Makoto, 2020. "Selling Constraints," CEPR Discussion Papers 14718, C.E.P.R. Discussion Papers.
    8. Rouskas, Evangelos, 2020. "A model of sales with a large number of sellers," Mathematical Social Sciences, Elsevier, vol. 104(C), pages 68-70.
    9. Bian, Xueying & Fabra, Natalia, 2020. "Incentives for information provision: Energy efficiency in the Spanish rental market," Energy Economics, Elsevier, vol. 90(C).
    10. Chen, Yanbin & Li, Sanxi & Lin, Kai & Yu, Jun, 2021. "Consumer search with blind buying," Games and Economic Behavior, Elsevier, vol. 126(C), pages 402-427.
    11. Ali Aljamal & Mark Speece & Mohsen Bagnied, 2020. "Sustainable Policy for Water Pricing in Kuwait," Sustainability, MDPI, vol. 12(8), pages 1-18, April.
    12. Honka, Elisabeth & Seiler, Stephan & Ursu, Raluca, 2024. "Consumer search: What can we learn from pre-purchase data?," Journal of Retailing, Elsevier, vol. 100(1), pages 114-129.
    13. Martin Obradovits & Philipp Plaickner, 2020. "Price-Directed Search and Collusion," Working Papers 2020-24, Faculty of Economics and Statistics, Universität Innsbruck.
    14. Pak Hung Au & Mark Whitmeyer, 2024. "Attraction Via Prices and Information," Papers 2402.11754, arXiv.org.
    15. Mark Armstrong & Jidong Zhou, 2011. "Paying for Prominence," Economic Journal, Royal Economic Society, vol. 121(556), pages 368-395, November.

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    More about this item

    Keywords

    Consumer search; Observable price; Search cost;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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