Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment

Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.

Search Costs and Risky Investment in Quality

One striking development associated with the explosion of e-commerce is the increased transparency of sellers' quality history. In this paper we analyze how this affects fi…rms' incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer's cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a fi…rm, despite its best efforts, may fail to live up to consumers' more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.search, internet search, quality, risky investment

CAN INCOME EQUALITY INCREASE COMPETITIVENESS?

This paper explores the relationship between income distribution, prices, production efficiency and aggregate output in a decentralized search economy. We show that income distribution determines how competitive the market is, and thereby affects production efficiency and aggregate output. It is shown that it is generally possible to engineer a judicious transfer of income from high to low income individuals which simultaneously increases income equality, competitiveness, and aggregate output.Search, Price Dispersion, Income Inequality, Consumer/Household Economics, D83,

A Field Study of Social Learning

We present a field study of social learning. The setting is a pair of adjacent fast food restaurants serving very similar cuisine whose main clientele are the students at a nearby major university. We observed whether an uninformed customer's choice of restaurant depends on the relative queue lengths at the two restaurants. Observations were made at two separate observation periods, the start of the academic year, when a significant proportion of customers had little or no experience with either restaurant, and the middle of the year, when most customers already had previous experience with the restaurants. It is found, consistent with the social learning hypothesis, that relative queue length has a significant effect at the first period but not at the second.

The Economics of Collective Brands

We consider the consequences of a shared brand name such as geographical names used to identify high quality products, for the incentives of otherwise autonomous firms to invest in quality. We contend that such collective brand labels improve communication between sellers and consumers, when the scale of production is too small for individual firms to establish reputations on a stand alone basis. This has two opposing effects on member firms’ incentives to invest in quality. On the one hand, it increases investment incentives by increasing the visibility and transparency of individual member firms, which increases the return from investment in quality. On the other hand, it creates an incentive to free ride on the group’s reputation, which can lead to less investment in quality. We identify parmater values under which collective branding delivers higher quality than is achievable by stand alone firms.

Search and Categorization

The internet has not only reduced consumer search costs, but has also enabled more efficient and sophisticated search procedures. For example, online consumers can streamline their search process if appropriately defined categories of products and services are available. This paper proposes a search model with product categories where consumers choose which categories to search and firms respond to such more targeted search by strategically choosing the categories in which to list their products. The analysis focuses on the relationship between category architecture and the type of information which can be credibly disclosed by firms' category choices to consumers

Search and Categorization

The internet has not only reduced consumer search costs, but has also enabled more efficient and sophisticated search procedures. For example, online consumers can streamline their search process if appropriately defined categories of products and services are available. This paper proposes a search model with product categories where consumers choose which categories to search and firms respond to such more targeted search by strategically choosing the categories in which to list their products. The analysis focuses on the relationship between category architecture and the type of information which can be credibly disclosed by firms' category choices to consumers