Search, Information, and Prices

Abstract

Consider a market with many identical firms offering a homogeneous good. A consumer obtains quotes from a subset of firms and buys from the firm offering the lowest price. The price is the number of firms from which the consumer obtains a quote. For any given ex ante distribution of the count, we obtain a tight upper bound (under first-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of firms' common-prior higher-order beliefs about the count, including the extreme cases of complete information (firms know the count exactly) and no information (firms only know the ex ante distribution of the count). A qualitative implication of our results is that even a small ex ante probability that the count is one can lead to dramatic increases in the expected price. The bound also applies in a wide class of models where the count distribution is endogenized, including models of simultaneous and sequential consumer search.