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 pricedirected search firms' expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small.

The effects of entry in a model of sales1

“…This gives rise to a gap in the support of the PPP equilibrium density function (see Proposition 2). Similar results have been found by Chen and Zhang (2011), Ding andZhang (2018), andBurdett et al (2004).…”

“…This gives rise to a gap in the support of the PPP equilibrium density function (see Proposition 2). Similar results have been found by Chen and Zhang (2011), Ding and Zhang (2018), and Burdett et al (2004). In Chen and Zhang (2011), the “effective” maximum willingness to pay of consumers differs because some are global searchers and therefore their “effective” maximum willingness to pay is their reservation price while others are local searchers and their maximum willingness to pay is their valuation.…”

A model of directed consumer search

“…6 The result that search costs are pro comp etitive when prices are observable is quite intuitive and has also appeared in the papers aforementioned. 7 Specifically, the mixedstrategy models of Armstrong and Zhou (2011) and Ding and Zhang (2018) yield that average prices decrease as search costs rise. Choi et al (2018) prove that this result is quite general in a setting like ours.…”

“…This feature makes it possible to explicitly characterize the mixed strategy equilibrium. Another case is Ding and Zhang (2018) who simplify the standard model of product differentiation by assuming that firms sell products that may or may not match the needs of consumers. The two-point probability distribution assumption allows for the computation of the mixed strategy equilibrium.…”

Sustainable Policy for Water Pricing in Kuwait

“…A higher water price is a loss to consumers, even if not very substantial for affluent Kuwaitis. On the other hand, consumers usually have a threshold (reservation) price, which is an upper limit of what is acceptable (e.g., [80,81]). Figure 2 shows the ratio of willingness/unwillingness from Table 4.…”