PROMINENCE AND MARKET POWER: ASYMMETRIC OLIGOPOLY WITH SEQUENTIAL CONSUMER SEARCH

Abstract

AbstractThis article presents a new perspective on the nature of market power through the lens of firm prominence. We build a model of oligopolistic price competition with sequential consumer search, showing that a larger firm sets a higher price than its smaller competitors. Consumers are more likely to encounter sellers from a larger firm both immediately and in future interactions, resulting in less‐elastic demand for that firm. Small firms can free‐ride on the prominent firm's market power to raise their prices and earn higher profits. The Herfindahl–Hirschman Index provides a useful guide for welfare evaluation.