CFDP 2224R2

Search, Information, and Prices

Author(s): 

Publication Date: March 2020

Revision Date: May 2020November 2020

Pages: 52

Abstract: 

Consider a market with identical firms offering a homogeneous good. A consumer obtains price quotes from a subset of firms and buys from the firm offering the lowest price. The “price count” is the number of firms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we derive a tight upper bound (under first-order stochastic dominance) 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 (firms know the price count) and no information (firms only know the ex ante distribution of the price count). A qualitative 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, including models of simultaneous and sequential consumer search.

Keywords: Search, Price Competition, Bertrand Competition, "Law of One Price", Price Count, Price Quote, Information Structure

JEL Classification Codes: D41, D42, D43, D83

JEL Classification Codes: D41D42D43D83

See CFDP Version(s): CFDP 2224CFDP 2224R