Multiproduct pricing and the Diamond Paradox

Rhodes, Andrew (2011): Multiproduct pricing and the Diamond Paradox.

Abstract

We study the pricing behavior of a multiproduct monopolist, when consumers must pay a search cost to learn its prices. Equilibrium prices are high because rational consumers understand that visiting the store exposes them to a hold-up problem. However a firm with more products attracts more consumers with low valuations, and therefore charges lower prices. We also show that when the firm advertises the price of one product, it provides consumers with some indirect information about all of its other prices. The firm can therefore build a store-wide ‘low-price image’ by advertising just one product at a low price.

• Item Type: MPRA Paper
• Language: English
• Keywords: multiproduct search, advertising
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M37 - Advertising; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness

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