The RAND Journal of Economics · 1999 · 92 citations · 0 references
BusinessBusiness EconomicsEconomicsIndustrial OrganizationMicroeconomicsPricing TheoryCompetitive PricingDynamic CompetitionMonopolistic CompetitionMonopoly PricingMultimarket CompetitionPrice CompetitionChamberlinian CompetitionMonopolistic Competition ModelsOligopolistic CompetitionPrice Competition Analysis
The model’s limit cases include the Bertrand Paradox, the Diamond Paradox, and Chamberlinian monopolistic competition. The study examines price competition under search costs and product differentiation. The results show that prices rise with search costs and fall with more firms, may initially drop with greater product differentiation, equilibrium diversity grows with search costs while the optimal level shrinks causing excessive entry, and the market failure is strongest when variety preference is low and search costs are high.
We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the Bertrand Paradox, the Diamond Paradox, and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs.