Seminar: Do higher search costs make markets less competitive?

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Jose Luis Moraga (VU)

Discussant: Mariëlle Non (CPB)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject
Standard search models assume that all consumers search at least once in equilibrium. This neglects an important role of the price mechanism, namely, that the price ought to affect the number of consumers who choose to search for a product in the first place. Recognising this role turns out to be critical for our understanding of the effect of higher search costs on prices and profits. We show that higher search costs may result in more elastic individual demand functions, and therefore lead to lower prices. This happens because an increase in search costs affects two margins, the intensive search margin, or search intensity, and the extensive search margin, or participation. Higher search costs result in less search intensity, making demand more inelastic; however, higher search costs lowers the participation of consumers who happen to search little, which makes demand more elastic. We identify one critical condition for higher search costs to result in lower prices, namely, that the search cost distribution has a decreasing elasticity with respect to the parameter that shifts the distribution. In that case, the effect of higher search costs on the extensive search margin is stronger than the effect on the intensive search margin. Our results hold no matter whether products are differentiated or homogenous and irrespective of whether consumers search sequentially or non-sequentially.

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