Sander Heinsalu, Australian National University

"Greater search cost reduces prices"

Abstract

The optimal price of each firm falls in the search cost of consumers, eventually to the monopoly level, despite the exit of lower-value consumers when search becomes costlier. The reason is that consumers who switch firms can be held up by charging a high price. Greater search cost reduces the fraction of incoming switchers in each firm’s demand, which decreases the hold-up motive, thus the price.

Contact person: Egor Starkov