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2 PAPERS: 1) Greater Search Cost Reduces Prices and 2) Higher Quality May Drive a Firm Out of Business (with Mihkel Tombak (UofT, Rotman))

Microeconomics Seminar 2020-2021
joint with the Département de sciences économiques, Université de Montréal

Organizer : Sean Horan (U. of Montreal)

* Invitation only. Please contact the organizer if you would like access.


Papier 1 : The optimal price of each firm falls in the search cost of consumers, eventually to the monopoly level, despite the exit of lower-value consumers when search becomes costlier. The reason is that consumers who switch firms can be held up by charging a high price. Greater search cost reduces the fraction of incoming switchers in each firm’s demand, which decreases the hold-up motive, thus the price.


Papier 2 : In a vertically differentiated duopoly in which firms choose observable quality and then compete on price, we show that a firm’s profit may decrease in its quality, even if quality is costless. Neither firm chooses maximal quality, because the rival’s response is a large price cut (a mass market strategy) that reduces both profits. If the better-quality firm has sufficiently higher cost, then a quality improvement causes it to exit. The profits of both firms may also increase in the cost of the high-quality firm.

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