Buyer search costs and endogeneous product design

Buyer search costs and endogeneous product design

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Article ID: iaor20061601
Country: United States
Volume: 23
Issue: 4
Start Page Number: 490
End Page Number: 499
Publication Date: Sep 2004
Journal: Marketing Science
Authors:
Keywords: design, e-commerce
Abstract:

Buyer search costs for price are changing in many markets. Through a model of buyer and seller behavior, I consider the effects of changing search costs on prices both when product differentiation is fixed and when it is endogeneously determined in equilibrium. If firms cannot change product design, lower buyer search costs for price lead to increased price competition. However, if product design is a decision variable, lower search costs for price may also lead to higher product differentiation, which decreases price competition. In this case, the overall effect of lower buyer search costs for price may even be higher prices, lower social welfare, and higher industry profits. The result is especially interesting because recent technological changes, such as Internet shopping, can affect the market structure through lowering buyer search costs.

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