Thursday, September 15, 2011

Search and Pricing Power Even in the Longrun

I sometimes teach search theory. And XKCD gets it in one picture.

An important implication is that, often, it is not worth it for a customer to find a better price. It depends on the costs of obtaining the new price quote and the variation in prices. From the seller's perspective, this means it can set prices above marginal cost and still retain some customers. Customers' different search costs can be the source for a firm having a downward sloping demand curve. So, even in the long-run with free entry, firms' prices need not equal marginal cost.

1 comment:

  1. XKCD ftw.
    How would one take advantage of this? My positioning oneself in a market with high search costs?