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Search, Design, and Market Structure1 - Cemfi

Search, Design, and Market Structure1 - Cemfi

Search, Design, and Market Structure1 -

Search, Design, and Market Structure 1 Heski Bar-Isaac Guillermo Caruana Vicente Cuñat NYU CEMFI LSE March, 2012 Abstract The Internet has made consumer search easier, with consequences for prices, industry structure and the kinds of products o¤ered. We explore these conse- quences in a rich but tractable model that allows for strategic design choices. A polarized market structure results, where some …rms choose designs aimed at broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all …rms and consumers are ex-ante identical. We analyze the e¤ect of reduced search costs and …nd results consistent with the reported prevalence of niche goods and the long-tail and superstar phe- nomena. In particular, the model suggests that long-tail e¤ects arise when there is a wide range of potential designs, relative to vertical heterogeneity among …rms. JEL: D83, L11, L86, M31 Keywords: Search, Internet, long-tail, superstar, design, marketing 1 Previous versions have circulated as “Costly Search and Design.” We thank for their helpful comments the Editor, three anonymous referees, Simon Anderson, Michael Baye, Antonio Cabrales, Juanjo Ganuza, Avi Goldfarb, Maarten Janssen, Justin Johnson, George Mailath, Ram Rao, Eric Rasmussen, Michael Rauh, Régis Renault, Andrew Rhodes, Konstantinos Serfes, Silvia Sonderegger, Yaron Yehezkel, and excellent seminar participants at many seminars. Financial support from the NET Institute (http://www.NETinst.org) is gratefully acknowledged. Guillermo Caruana acknowledges the …nancial support of the Spanish Ministry of Science and Innovation through grant ECO2008-00801. Contact info: Bar-Isaac: heski@nyu.edu; Department of Economics, Stern School of Business, NYU, 44 West 4th street 7-73, NYC, NY 10012 USA; Caruana: caruana@cem….es; Casado del Alisal 5, 28014 Madrid, Spain; and Cuñat: v.cunat@lse.ac.uk, Room A450, Department of Finance, London School of Economics, Houghton Street, London WC2A 2AE, U.K. 1

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