Search and Competition with Flexible Investigations

TL;DR

This paper extends the standard price competition model by allowing consumers to flexibly acquire information during their visits, revealing how different frictions impact market outcomes and consumer welfare.

Contribution

It introduces a model where consumers can dynamically acquire information, highlighting the distinct effects of search and information frictions on prices, profits, and welfare.

Findings

Higher search costs increase prices and firm profits.

Higher information acquisition costs lower prices and can benefit consumers.

Fundamental differences exist between search and information frictions in markets.

Abstract

We modify the standard model of price competition with horizontally differentiated products, imperfect information, and search frictions by allowing consumers to flexibly acquire information about a product's match value during their visits. We characterize a consumer's optimal search and information acquisition protocol and analyze the pricing game between firms. Notably, we establish that in search markets there are fundamental differences between search frictions and information frictions, which affect market prices, profits, and consumer welfare in markedly different ways. Although higher search costs beget higher prices (and profits for firms), higher information acquisition costs lead to lower prices and may benefit consumers. We discuss implications of our findings for policies concerning disclosure rules and hidden fees.