Working Paper: NBER ID: w28638
Authors: Guido Menzio
Abstract: As search frictions become smaller in the market for a consumer product, buyers are able to locate and access more sellers per unit of time. In response, sellers choose to design varieties of the product that are more specialized in order to exploit differences in the buyers' preferences. I find mild conditions on the fundamentals under which the decline in search frictions and the increase in specialization have exactly offsetting effects on the extent of competition in the market. Under these conditions, price dispersion remains constant over time even though search frictions are vanishing. Buyer's surplus and seller's profit, however, grow at a constant endogenous rate, as the endogenous increase in specialization allows sellers to cater better and better to the heterogeneous desires of buyers.
Keywords: search frictions; competition; product design; price dispersion; economic growth
JEL Codes: D43; E23; L13; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Declining search frictions (D83) | Increase in product specialization (L69) |
| Increase in product specialization (L69) | Maintains price dispersion at a constant level (D41) |
| Declining search frictions (D83) | Maintains price dispersion at a constant level (D41) |
| Declining search frictions (D83) | Increase in competition (L13) |
| Increase in competition (L13) | Maintains price dispersion at a constant level (D41) |