Price competition with cost heterogeneity and prominence

Abstract

This thesis aims to show how in a price comparison platform, where prominence is auctioned to the retailers with different marginal costs, the low-cost retailer will, counter-intuitively, under certain conditions, be incentivized to charge higher prices on average than its high-cost counterpart. This will happen because consumers will have to incur heterogeneous search costs when shopping in the platform, therefore some consumers will purchase from the prominent retailer while others will continue shopping and purchase from the cheapest firm. This implies that the prominent firm faces a more inelastic demand and, as such, is more strongly incentivized to charge higher prices. The low-cost firm can, for the same price, extract higher margins from consumers, therefore, if the proportion of consumers with high search costs is high enough, then the low-cost retailer will outbid the other firm in the auction for prominence. A prominent low-cost firm faces contradictory effects, the lower marginal cost incentivizes lower average prices yet the exclusive access to a segment of consumers with rigid demand incentivizes higher average prices. If that segment is sufficiently large the latter effect will dominate and the low-cost firm will charge a higher expected price than the high cost firm.

Date of Award	25 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Catarina Reis (Supervisor) & Samir Mamadehussene (Supervisor)