Pricing, Consumer Search and the Size of Internet Markets

Despite the mixed empirical evidence, many economists still hold to the view that Internet will promote competition between firms, thereby lowering prices and increasing economic welfare. This paper presents a search model that provides a different view. We analyze the market for a homogeneous good where some consumers are fully informed while others are not. Depending on the parameter values, there may be three types of equilibria and the comparative statics results are different for each of these equilibria. For example, a reduction in search cost may raise equilibrium prices when consumers' search intensity is low, but reduce prices when consumers search intensity is high. These different comparative statics results may explain the mixed empirical evidence found so far. <BR><BR>