Beliefs and consumer search

Maarten Janssen, Sandro Shelegia

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.

Department of Economics
No. of pages
Publication date
Austrian Fields of Science 2012
502047 Economic theory
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