CESifo Working Paper No. 1332

A Note on Costly Sequential Search
and Oligopoly Pricing

Abstract

We modify the paper of Stahl (1989) on sequential consumer search in an oligopoly context
by relaxing the assumption that consumers obtain the first price quotation for free. When all
price quotations are costly to obtain, a new equilibrium arises where consumers randomize
between not searching at all and searching for one price. The region of parameters for which
this equilibrium exists becomes larger as the number of shoppers decreases and/or the number
of firms increases. The comparative statics properties of this new equilibrium are interesting.
In particular, the expected price increases as search cost decreases, and is constant in the
number of shoppers and in the number of firms. We show that the Diamond result never
obtains with truly costly search.

JEL Code: C13, D40, D83, L13.

Keywords: sequential consumer search, oligopoly, price dispersion.

Matthijs R. Wildenbeest
Department of Economics
Erasmus University Rotterdam
P.O. Box 1738

3000 DR Rotterdam
The Netherlands
[email protected]

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