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Oligopolistic markets with sequential search and production cost uncertainty

Authors


  • We are grateful to Mark Armstrong (editor), anonymous referees, Benny Moldovanu, José Luis Moraga-González, Manfred Nermuth, Regis Renault, Sandro Shelegia, and Chris Wilson and to audiences at the EEA-ESEM 2009 in Barcelona, the Workshop “Search and Switching Costs” in Groningen, the “Theoretischer Ausschuß des Vereins für Socialpolitik,” the Vienna University of Economics and Business Administration, the University of Vienna, the Institute for Advanced Studies (Vienna), the Meeting of Austrian Competition Authorities, the Norwegian School of Management, the 2010 World Congress of the Econometric Society, and the ECARES (Université Libre de Bruxelles) for helpful comments. An earlier version of this article was circulated under the title “Sequential Search with Incompletely Informed Consumers: Theory and Evidence from Retail Gasoline Markets.” Janssen and Weidenholzer thank the Wiener Wissenschafts-, Forschungs- und Technologiefonds (WWTF) for financial support under project no. MA 09-017. The views expressed in this article are those of the authors and do not necessarily reflect the views of the Oesterreichische Nationalbank.

Abstract

This article analyzes a sequential search model where firms face identical but stochastic production costs, the realizations of which are unknown to consumers. We characterize a perfect Bayesian equilibrium satisfying a reservation price property and provide a sufficient condition for such an equilibrium to exist. We show that (i) firms set on average higher prices and make larger profits compared to the scenario where consumers observe production costs, (ii) expected prices and consumer welfare can be non-monotonic in the number of firms, and (iii) the impact of production cost uncertainty vanishes as the number of firms becomes very large.

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