Beliefs and consumer search

Maarten Janssen, Sandro Shelegia

Publications: Working paper

Abstract

When consumers search sequentially for prices and product matches, their beliefs of what they will encounter at the next rm are important in deciding whether or not to continue to search. In search environments where retailers have a common cost that is not known to consumers and is either the outcome of a random process or strategically set by an upstream firm, it is natural for consumers to have symmetric beliefs. We show that market outcomes under symmetric beliefs are quantitatively and qualitatively different from outcomes when consumers hold passive beliefs. Market prices are higher with symmetric beliefs (and can be as high as the joint profit maximizing prices), and are non-monotonic in the search cost. Moreover, price rigidities arise endogenously as retailers are not willing to charge prices above consumers' reservation utility. These phenomena become exacerbated in a vertical relations environment.
Original languageEnglish
Number of pages36
Publication statusPublished - Jan 2015

Publication series

SeriesVienna Economics Papers
NumberNo. 1501

Austrian Fields of Science 2012

  • 502047 Economic theory

Keywords

  • Vertical Relations, Consumer Search, Double Marginalization

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