Abstract
Price setting by firms and search by customers is analyzed, relaxing two basic attributes of most search models: price precommitment and agent heterogeneity. Customers are characterized by individual demand functions for a homogeneous good and can choose to employ a threat to search. Firms noncooperatively make pricing decisions by using the individual demand curves under conditions of constant marginal cost. Firms adopt pricing rules that optimally respond to customer search histories. Bargaining power is endogenously assigned. Firms know their common marginal cost; customers, the cost distribution. The unique separating equilibrium is characterized by a lumpy distribution of prices and by heterogeneous shopping behavior by customers giving rise to “shoppers” and “nonshoppers”
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