Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model
Volume: Volume 30, No. 4
Issue: Winter 1999
Pages: pp. 719-735
Authors: Simon P. Anderson and Regis Renault
Title: Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model
Abstract: We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the "Bertrand Paradox," the "Diamond Paradox," and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs.
JEL Classification
Market Structure, Firm Strategy, and Market Performance: Oligopoly and Other
Imperfect Markets; monopolistic competition; contestable markets (L130)
Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection (D430)
Competition
Differentiation
Equilibrium
Firm, Firms
Monopolistic Competition
Pricing
Product Differentiation