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Costly Buyer Search in a Differentiated Products Model: An Experimental Study
Author(s) -
Mago Shakun Datta
Publication year - 2010
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2010.77.2.282
Subject(s) - comparative statics , intuition , microeconomics , economics , price dispersion , externality , product (mathematics) , market power , search cost , complete information , monopoly , philosophy , geometry , mathematics , epistemology
This study examines whether the content of buyer information and the timing of its dissemination affects seller market power. We construct laboratory markets with differentiated goods and costly buyer search in which sellers simultaneously post prices. The experiment varies the information on price or product characteristics that buyers learn under different timing assumptions (pre‐ and postsearch), generating four information treatments. Theory predicts that price information lowers the equilibrium price, but information about product characteristics increases the equilibrium price. That is, contrary to intuition, the presence of informed buyers may impart a negative externality on other uninformed buyers. Data support the model's negative externality result when sellers face a large number of robot buyers that are programmed to search optimally. Observed prices conform to the model's comparative statics and are broadly consistent with predicted levels. With human buyers, however, excessive search instigates increased price competition, and sellers post prices that are significantly lower than predicted.