In this project, we modify Wolinsky’s sequential search model to accommodate heterogeneous search costs and consumers with different search modes. Based on their search costs, consumers endogenously adjust their search behavior. Accordingly, we classify consumers into two categories, item shoppers and brand shoppers, and establish the link between bundle preference and search frictions under the dispersive order. We characterize the existence of equilibrium and show that among the pooling equilibrium where all consumers adopt the same search modes, equilibrium prices increase with search costs in the FOSD sense. The model also points out the possibility of unconventional price response to search costs as firms coordinate on the equilibrium with both item shoppers and brand shoppers....[ Read more ]

In this project, we modify Wolinsky’s sequential search model to accommodate heterogeneous search costs and consumers with different search modes. Based on their search costs, consumers endogenously adjust their search behavior. Accordingly, we classify consumers into two categories, item shoppers and brand shoppers, and establish the link between bundle preference and search frictions under the dispersive order. We characterize the existence of equilibrium and show that among the pooling equilibrium where all consumers adopt the same search modes, equilibrium prices increase with search costs in the FOSD sense. The model also points out the possibility of unconventional price response to search costs as firms coordinate on the equilibrium with both item shoppers and brand shoppers.