Search and Segregation

Obradovits, Martin (2017): Search and Segregation.

Abstract

Consumers' willingness to pay for an identical product, e.g. as caused by differences in local income or tastes, may differ greatly across locations. Yet, while a large literature examines consumers' optimal price and product-search behavior under various market configurations, the equilibrium effects of such consumer segregation remain unexplored. To this end, I study a stylized model in which two local monopolistic markets differ in size and their consumers' willingness to pay. After observing their native market's price, a subset of flexible consumers may travel to the other market at positive cost, hoping for a bargain. I show that as long as the proportion of flexible high-valuation consumers is not too large, active and directed search to the lower-valuation market will occur in equilibrium. If the higher-valuation market is relatively large in size, complex mixed-strategy pricing emerges in equilibrium. For regulators, increasing the fraction of flexible consumers tends to be more effective than manipulating search costs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer Search; Segregation; Clustering; Mixed-Strategy Pricing; Asymmetric Market Structure; Active Search
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

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