Working Paper: CEPR ID: DP1277
Authors: Norbert Schulz; Konrad Stahl
Abstract: We develop a model of search among substitutes for the best combination of commodity variant and price, in which the structure of search costs can be manipulated by the suppliers of these variants, e.g. by joining an existing market or opening a new one. We analyse the subgame perfect equilibria arising in a multistage game involving specialized firms' choice of entry, variant and price; and compare them to a multiproduct monopolist's optimal choice. Together with the existence and uniqueness of (symmetric) equilibria we show that equilibrium prices increase in the number of substitutes sold in one market, and that a monopolist selling the same number of variants charges lower prices. The monopolist will also end up selling at least as much variety. Hence, in the situation considered here, monopoly tends to increase welfare.
Keywords: monopoly; oligopoly; search; information
JEL Codes: D42; D43; D83; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumers' search for the best combination of commodity variants and prices (D10) | Increase in equilibrium prices (D59) |
| Entry of specialized firms into a competitive market (L19) | Increase in overall market demand (D49) |
| Entry of specialized firms (L26) | Increase in equilibrium prices (D59) |
| Monopolist's ability to internalize the demand externality (D42) | Better pricing strategies compared to specialized firms (D49) |
| Number of variants offered (C29) | Equilibrium prices and profits of both specialized firms and the monopolist (D43) |
| Entry into the market (D40) | Higher equilibrium prices (D41) |