A Model of Search with Price Discrimination

Abstract

We introduce observable heterogeneity across buyers into a model of simultaneous search. Buyers' di erences are informative about their willingness to search, giving rise to price discrimination even if they all have the same willingness to pay. We analyze and compare equilibrium outcomes when price discrimination is allowed and when it is not. We nd that the price comparison across consumers as well as the e ects of banning price price discrimination critically depend on the elasticity of the search cost distribution. Interestingly, for normally distributed search costs, there is an inverted U-shape relationship between prices and buyers' size. Similarly, a ban on price discrimination hurts small and large buyers, to the bene t of the medium-size ones.

Keywords: bid solicitation, Competition, search, third-degree price discrimination

JEL Classification: D43, D83