The informational divide

• Published in: Games and economic behavior 2013-03, Vol.78, p.21-30
• Main Authors: Nermuth, Manfred, Pasini, Giacomo, Pin, Paolo, Weidenholzer, Simon
• Format: Article
• Language: English
• Subjects: Comparative analysis; Competition; Consumer behavior; Informational divide; Price competition on networks; Price dispersion; Prices; Studies; Welfare effects of search
• ISSN: 0899-8256; 1090-2473
• DOI: 10.1016/j.geb.2012.10.016

We propose a model of price competition where consumers exogenously differ in the number of prices they compare. Our model can be interpreted either as a non-sequential search model or as a network model of price competition. We show that (i) if consumers who previously just sampled one firm start to compare more prices all types of consumers will expect to pay a lower price and (ii) if consumers who already sampled more than one price sample (even) more prices then there exists a threshold – the informational divide – such that all consumers comparing fewer prices than this threshold will expect to pay a higher price whereas all consumers comparing more prices will expect to pay a lower price than before. Thus increased search can create a negative externality and it is not necessarily beneficial for all consumers. ► A model of price competition where consumers exogenously differ in the number of prices they compare. ► More search for uninformed consumers has a positive price externality to all consumers. ► More search for partially informed consumers has a negative price externality to low informed consumers: this is the informational divide.