Attraction Via Prices and Information

TL;DR

This paper examines how firms' ability to commit to information policies affects consumer search behavior and market outcomes in an oligopoly, highlighting the trade-offs between price competition and active search.

Contribution

It introduces a model showing the impact of commitment power on information provision, search activity, and price dispersion in markets with search frictions.

Findings

Active search occurs only when firms can commit to guiding information.

Market thinness influences consumer preferences for search strategies.

Firms prefer guiding search through prices and information policies over no commitment.

Abstract

We study the ramifications of increased commitment power for information provision in an oligopolistic market with search frictions. Although prices are posted and, therefore, guide search, if firms cannot commit to information provision policies, there is no active search at equilibrium so consumers visit (and purchase from) at most one firm. If firms can guide search by both their prices and information policies, there exists a unique symmetric equilibrium exhibiting price dispersion and active search. Nevertheless, when the market is thin, consumers prefer the former case, which features intense price competition. Firms always prefer the latter.