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Can Prominence Matter even in an Almost Frictionless Market?

Authors


  •  Corresponding author: Andrew Rhodes, Department of Economics, University of Oxford, Manor Road Building, Manor Road, Oxford, OX1 3UQ, UK. Email: andrew.rhodes@economics.ox.ac.uk.

  • I thank Paul Klemperer, David Myatt, John Thanassoulis, Mike Waterson, Chris Wilson and especially Jidong Zhou for their helpful comments, as well as participants at the CEPR IO School (Mannheim) and RES (Surrey). Financial assistance from the Economic and Social Research Council and the British Academy is also gratefully acknowledged.

Abstract

Consumer search on the Internet is rarely random. Sponsored links appear higher up a webpage and consumers often click them. Firms also bid aggressively for these ‘prominent’ positions at the top of the page. But why should prominence matter, when visiting an additional website is almost costless? I present a model in which consumers know their valuations for the products offered in the market but do not know which retailer sells which product. I show that a prominent retailer earns significantly more profit than other firms, even when the cost of searching websites and comparing products is essentially zero.

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