On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

If searching for a better price becomes easier for consumers, conventional wisdom suggests that pricing pressure will increase on firms, thereby lowering prices, reducing firm profits and narrowing assortments. There is indeed evidence that recent search facilitating technologies, such as the Internet, have in some markets reduced prices. But there is also evidence that firms have been able to maintain some pricing power. Furthermore, there is evidence that the Internet has expanded variety in some markets and this broadening of the available assortment has increased consumer welfare significantly. This paper studies a model in which firms compete on price and assortment and consumers search for products that match their preferences at a reasonable price. Easier search does exhibit a competition intensifying effect in our model, and this effect puts pressure on firms to lower their prices and reduce assortments. But we also show that easier search exhibits a market expansion effect that encourages firms to expand their assortment. Due to broader assortments, consumers are more likely to find products that match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices, broader assortments, more profits and expanded welfare.