Search, Information, and Prices

This paper studies the role of consumer search in determining prices of a homogeneous product sold by competing firms; in particular, it provides an upper bound on distribution of prices as a function of the number of price quotes that consumers obtain. A consequence of the paper’s results is that firms’ belief that consumers may only obtain one price quote can lead to high prices.

Abstract

Consider a market with identical firms offering a homogeneous good. For any given ex ante distribution of the price count (the number of firms from which a consumer obtains a quote), we derive a tight upper bound on the equilibrium distribution of sales prices. The bound holds across all models of firms’ common-prior higher-order beliefs about the price count, including the extreme cases of full information and no information. One implication of our results is that a small ex ante probability that the price count is equal to one can lead to a large increase in the expected price. The bound also applies in a large class of models where the price count distribution is endogenously determined.

Author(s)

Dirk Bergemann, Benjamin Brooks & Stephen Morris

Publication Link

Search, Information, and Prices

Publication Date

August 2021