Search and Ripoff Externalities

Armstrong, Mark (2014): Search and Ripoff Externalities.

Abstract

This paper surveys models of markets in which some consumers are "savvy" while others are not. We discuss when the presence of savvy consumers improves the deals available to non-savvy consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for savvy consumers (ripoff externalities). We also discuss when the two groups of consumers have aligned or divergent views about market interventions. The analysis covers two overlapping families of models: those which examine markets with price/quality dispersion, and those which exhibit forms of consumer hold-up.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer protection, consumer search, price dispersion, hold-up, add-on pricing.
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics > D18 - Consumer Protection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising

References

Akerlof, G. (1970), "The Market for Lemons: Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics, 84(3), 488-500.

Anderson, S., and R. Renault (2000), "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, 41(3), 721-742.

Anderson, S., and R. Renault (2006), "Advertising Content," American Economic Review, 96(1), 93-113.

Armstrong, M. (2008), "Interactions between Competition and Consumer Policy," Competition Policy International, 4(1), 97-147.

Armstrong, M., and Y. Chen (2009), "Inattentive Consumers and Product Quality," Journal of the European Economic Association, 7(2-3), 411-422.

Armstrong, M., and J. Vickers (2012), "Consumer Protection and Contingent Charges," Journal of Economic Literature, 50(2), 477-493.

Armstrong, M., J. Vickers, and J. Zhou (2009), "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, 7(2-3), 399-410.

Armstrong, M., and J. Zhou (2011), "Paying for Prominence," Economic Journal, 121(556), F368-395.

Baye, M., and J. Morgan (2002), "Information Gatekeepers and Price Discrimination on the Internet," Economics Letters, 76(1), 47-51.

Besanko, D., and W. Winston (1990), "Optimal Price Skimming by a Monopolist Facing Rational Consumers,"Management Science, 36(5), 555-567.

Brown, J., and A. Goolsbee (2002), "Does the Internet Makes Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, 110(3), 481-507.

Burdett, K., and K. Judd (1983), "Equilibrium Price Dispersion," Econometrica, 51(4), 955-969.

Chioveanu, I., and J. Zhou (2013), "Price Competition with Consumer Confusion," Management Science, 59(11), 2450-2469.

Clerides, S., and P. Courty (2013), "Sales, Quantity Surcharge, and Consumer Inattention," mimeo.

Coase, R. (1972), "Durability and Monopoly," Journal of Law and Economics, 15(1), 143-149.

Cooper, R., and T. Ross (1984), "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, 51(2), 197-207.

DellaVigna, S., and U. Malmendier (2004), "Contract Design and Self-Control: Theory and Evidence," Quarterly Journal of Economics, 119, 353-402.

Diamond, P. (1971), "A Model of Price Adjustment," Journal of Economic Theory, 3(2), 156-168.

Dubovik, A., and M. Janssen (2012), "Oligopolistic Competition in Price and Quality," Games and Economic Behavior, 75(1), 120-138.

Ellison, G. (2005), "A Model of Add-on Pricing," Quarterly Journal of Economics, 120(2), 585-637.

Fershtman, C., and A. Fishman (1994), "The Perverse Effects of Wage and Price Controls in Search Markets," European Economic Review, 38(5), 1099-1112.

Gabaix, X., and D. Laibson (2006), "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Quarterly Journal of Economics, 121(2), 505-540.

Grossman, S., and J. Stiglitz (1980), "On the Impossibility of Informationally Efficient Markets," American Economic Review, 79(3), 393-408.

Grubb, M. (2014), "Consumer Inattention and Bill-Shock Regulation," Review of Economic Studies, forthcoming.

Inderst, R., and M. Ottaviani (2012), "Financial Advice," Journal of Economic Literature, 50(2), 494-512.

Knittel, C., and V. Stango (2003), "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, 93(5), 1703-1729.

Morgan, J., H. Orzen, and M. Sefton (2006), "An Experimental Study of Price Dispersion," Games and Economic Behavior, 54(1), 134-158.

Petrikaite, V. (2014), "Collusion with Costly Consumer Search," mimeo, University of Groningen.

Piccione, M., and R. Spiegler (2012), "Price Competition Under Limited Comparability," Quarterly Journal of Economics, 127(1), 97-135.

Salop, S., and J. Stiglitz (1977), "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, 44(3), 493-510.

Sandroni, A., and F. Squintani (2007), "Overconfidence, Insurance and Paternalism," American Economic Review, 97(5), 1994-2004.

Schultz, C. (2005), "Transparency on the Consumer Side and Tacit Collusion," European Economic Review, 49(2), 279-297.

Spiegler, R. (2011), Bounded Rationality and Industrial Organization. Oxford University Press, Oxford, UK.

Stiglitz, J. (1979), "Equilibrium in Product Markets with Imperfect Information," American Economic Review, 69(2), 339-345.

Varian, H. (1980), "A Model of Sales," American Economic Review, 70(4), 651-659.