Finding a Good Deal

The paper presented in this ZEW Research Seminar studies markets in which potential buyers engage in costly search to find a good deal. The authors novel solution concept for prices builds upon the idea that any movement in a firm’s price is followed by an opportunity for its competitors to respond with special offers. This mechanism selects the highest prices such that no firm wishes to undercut a competitor. They identify a distinctive closed-form pattern of disperse prices that uniquely satisfy their pricing solution, and pair that price profile with optimal fixed-sample search. In a stable equilibrium with active search, the intensity of search and consumer surplus are lower and industry profit is higher with more competitors. In a concentrated oligopoly, complete search in equilibrium can eliminate industry profit.