Eeva's website

Sequential Search with Limited Price Discrimination

Abstract: I study price discrimination in a model of sequential search based on Stahl (1989). Firms are probabilistically able to discriminate between consumers based on their search costs. The "common" prices that are o fferd both to consumers with zero search cost ("shoppers") and with a positive search cost ("nonshoppers") serve the same dual purpose as in Stahl (1989): attracting the shoppers and extracting pro fits from the nonshoppers. The shoppers' discriminatory price is randomly drawn, but always lower than any common price. The nonshoppers' discriminatory price is, instead, equal to their cuto ff price. When price discrimination is allowed, then an individual firm's profi ts increase in the number of competitors for an open set of parameter values. A fi rm, thus, sometimes strictly prefers more competitors and can more than double its profi ts by splitting and selling as two entities. Such spurious competition erodes consumer welfare.