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The Costly Quest for a Better Price - A Model of Search and Information Costs

Miao, Chun-Hui (2017): The Costly Quest for a Better Price - A Model of Search and Information Costs.

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Abstract

In many markets, consumers obtain price quotes before making purchases. This paper considers a fixed-sample size model of consumer search for price quotes when sellers must spend resources to learn the costs of providing goods/services. It is found that (1) even with ex ante identical consumers and sellers, there is price dispersion in the equilibrium; (2) despite price dispersion and zero search costs, it may be optimal to search just two sellers; (3) the optimal number of searches can increase with sellers' information costs; (4) the expected equilibrium price can decrease with consumers' search costs.

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