The Review of Economic Studies, Vol. 82, Issue 1, pp. 360 - 390, 2015.
We study the pricing behavior of a multiproduct .firm, when consumers must pay a search cost to learn its prices. Equilibrium prices are high, because consumers understand that visiting a store exposes them to a hold-up problem. However a fi.rm with more products charges lower prices, because it attracts consumers who are more price-sensitive. Similarly when a .firm advertises a low price on one product, consumers rationally expect it to charge somewhat lower prices on its other products as well. We therefore .find that having a large product range, and advertising a low price on one product, are substitute ways of building a `low price image'. Finally, we show that in a competitive setting each product has a high regular price, with .firms occasionally giving random discounts that are positively correlated across products.
(Previously circulated as 'Multiproduct Pricing and the Diamond Paradox')
Re-examining the effects of switching costs
Economic Theory, Vol. 57, Issue 1, pp. 161-194, 2014
Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.
The Economic Journal, Vol. 121, Issue 556, pp. F297-F308, 2011
Consumer search on the internet is rarely random. Sponsored links appear higher up a webpage and consumers often click them. Firms also bid aggressively for these 'prominent' positions at the top of the page. But why should prominence matter, when visiting an additional website is almost costless? We present a model in which consumers know their valuations for the products offered in the market, but do not know which retailer sells which product. We show that a prominent retailer earns significantly more profit than other firms, even when the cost of searching websites and comparing products is essentially zero.
Behavior-based pricing with experience goods (with Romain de Nijs)
Economics Letters, Vol. 118, Issue 1, pp. 155-158, 2013
We consider a two-period model in which duopolists sell experience goods and practice behavior-based price discrimination (BBPD). We give general conditions for when firms should offer a lower price to existing customers ('pay-to-stay') or to new customers ('pay-to-switch'). We also demonstrate that unlike previous results, BBPD may intensify competition in the first period but weaken it in the second.
Work in progress
“False advertising” (joint with Chris Wilson)
There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature.
“Consumer Search and Retail Market Structure” (joint with Jidong Zhou)
This paper proposes a framework for studying how consumer search frictions affect retail market structure. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and value the one-stop shopping convenience associated with a multiproduct firm. We find that when the search friction is relatively large all firms are multiproduct in equilibrium. However when the search friction is smaller the equilibrium market structure is asymmetric, with single-product and multiproduct firms coexisting. This asymmetric market structure often leads to the weakest price competition, and is the worst for consumers among all possible market structures. Due to the endogeneity of market structure, a reduction in the search friction can increase market prices and total industry profit.
“Retargeting” (joint with Alex de Corniere and Greg Taylor)