Dynamic Consumer Search

Category: Applied Microeconomics and Organization Seminar
When: 22 January 2020
, 17:15
 - 18:30
Where: RuW 4.201


We consider a model in which firms sell differentiated products, and consumers are interested in buying repeatedly over time but need to search for price and product information. Firms and consumers turn over at an exogenous rate. We show that provided the search cost is not too large, the market exhibits pure strategy price dispersion. Specifically, older firms charge higher prices because they face a larger and `better-matched' demand. The fact that sellers gradually raise their prices over time also leads to rich consumer search and purchase dynamics. For example, consumers may initially search a lot for a product, return to the seller and buy for several periods, but then faced with successive price increases quit the firm and search again for a new product. We also provide conditions under which the ability of sellers to contact past customers and offer them personalized prices leads to higher consumer surplus.