Price Competition in Search Markets: The Role of Consumer Consideration Sets

We extend Stahl (1989)’s workhorse model of consumer search to incorporate heterogeneous consideration sets. In the model, firms sell identical products, and consumers engage in optimal price search. Similar to Stahl’s model, some consumers incur positive search costs and conduct sequential searches, while others face zero search costs and always purchase from the firm offering the lowest price. Unlike Stahl’s model, consumers conducting searches may have varying consideration sets. We first illustrate how heterogeneous consideration sets affect equilibrium outcomes in a symmetric duopoly context. When the captive-to-reach ratio is low, the equilibrium mixed pricing strategy resembles that in Stahl’s model. However, with a high captive-to-reach ratio, the equilibrium differs significantly: (1) firms’ pricing strategy consists of a high-price range and a low-price range, each determined by specific probabilities; (2) firms may set prices above searching consumers’ reservation price with a certain probability, while at other times, they price below it; (3) some consumers may visit multiple firms before making a purchase, indicating a genuine process of sequential search; and (4) a decrease in search costs can result in higher prices. We also discuss the cases for symmetric oligopoly and for asymmetric duopoly.