Working Paper: CEPR ID: DP16724
Authors: Simon P. Anderson; Régis Renault
Abstract: We formulate a tractable model of pricing under directed search with heterogeneousfirm demands. Demand height and width drive bids in a position auction and enableus to bridge insights from the ordered search literature to those in the position auctionliterature. Equilibrium pricing implies that the marginal consumer’s surplus decreasesdown the search order, so consumers optimally follow the firms’ position ordering. Afirm suffers from ”business stealing” by firms that precede it and ”search appeal” fromsubsequent firms. We find rankings that achieve the maximal joint profit, social welfare,or consumer surplus by constructing firm-specific scores. A generalized second priceauction for positions endogenizes equilibrium orders and bids are driven by positionexternalities that impact incremental profit from switching positions. The joint profitmaximization order is upheld when firm heterogeneity concerns mostly demand height.But the consumer welfare order is robust when firms differ mostly over demand width.
Keywords: ordered search; product heterogeneity; position externalities; optimal and equilibrium rankings; generalized second price auction; position auction
JEL Codes: L13; M37; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand height (L97) | Equilibrium prices (D41) |
| Demand width (D39) | Sales of firms positioned later in the search order (L81) |
| Position in search order (C69) | Marginal consumer's surplus (D11) |
| Earlier positioned firms (L29) | Capture more consumers (D16) |
| Firm-specific scores (G32) | Rankings that maximize joint profit, social welfare, or consumer surplus (D63) |
| Position externalities (D62) | Incremental profit from switching positions (C69) |
| Equilibrium pricing behavior (D41) | Higher surplus for the marginal consumer (D11) |