A Model for Equilibrium Consumer Search in Markets with Correlated Products Restricted; Files Only

Abstract

I consider a duopoly market model in which consumers and firms condition their strategies on the correlation between the values provided by the two products. I derive the consumer's optimal search strategy given this correlation. Based on consumer behavior, I provide a necessary and sufficient condition that determines whether firms charge competitive prices in equilibrium. I illustrate the unique equilibria in cases of perfectly correlated, independent, and perfectly negatively correlated values and analyze the effect of search costs on consumer utility respectively. I also explain how two types of mixed-strategy equilibria can be extended to other levels of correlation.

Table of Contents

Introduction .............................................................. 1

Model ....................................................................... 2

Consumer Behavior .................................................... 4

Optimal Search Strategy .......................................... 4

Shopping Outcomes ................................................ 5

Market Equilibria ....................................................... 7

Special Equilibria .................................................. 10

Discussion ............................................................... 15

Appendix ................................................................. 17

About this Honors Thesis

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School	Emory College
Department	Economics
Degree	B.S.
Submission	Honors Thesis
Language	English
Research Field	Economics, Theory
Keyword	Pricing policy Consumer search
Committee Chair / Thesis Advisor	Daniel Fershtman, Emory University
Committee Members	Kyungmin (Teddy) Kim, Emory University Andreas Züfle, Emory University

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