Search, Design, and Market Structure

Abstract

The Internet has made consumer search much easier with consequences for competition, industry structure and product o¤erings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We …nd a polarized market structure, where some …rms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all …rms and consumers are ex-ante identical. We perform comparative statics and show the e¤ect of a fall in search costs on the designs, market shares, prices, and pro…ts of di¤erent …rms. In particular, a fall in search costs, through the e¤ect on product designs, can lead to higher industry prices and pro…ts. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.

Search Costs and Investment in Quality

“…The latter case is consistent with the view that the internet leads to more competitive markets dominated by a small number of high demand firmsthe 'superstar effect' (Brynjolfsson, Hu and Smith [2010], Goldmanis, Hortacsu, Syverson and Emre [2010], Bar-Isaac, Caruana and Cuñat [2012]). In our model, lower search costs which makes it easier for consumers to find better firms and increase the amount sold by each high quality firm, also increases competition, reducing the return to investment and hence the number of high quality firms.…”

Prices, Locations and Welfare When an Online Retailer Competes with Heterogeneous Brick‐and‐Mortar Retailers

“…If the urban (rural) area is interpreted as a mainstream (niche) market as in Bar-Isaac et al [2012], the introduction of an online retailer induces physical retailers to become more mainstream, while the online retailer serves the niche interests. Notably, our discussion focuses on the competition effect of the Internet, following Bar-Isaac et al [2012], who rely on the role of the Internet in reducing search costs.…”

Prices, Profits, and Preference Dependence

“…Chen and Pearcy [2010] uses a specific class of copulas to model intertemporal dependence of consumer values. Other promising topic areas include the economics of search (e.g., Anderson and Renault [1999]; Schulz and Stahl [1996]; Bar-Isaac, Caruana and Cuñat [2012]), and the endogenous determination of market structure (e.g., Shaked and Sutton, 1990). Furthermore, the copula approach to discrete choice demand, and its potentially rich set of predictions about market structure, conduct and performance, might open interesting new directions for empirical industrial organization research.…”