Cost reduction and consumer search

Abstract

Some markets are characterized by a systematic relation between how costly it is for consumers to observe prices, market power, and incentives to reduce costs. This paper offers a model of such markets and discusses incentives to invest in cost reduction. I develop two partial equilibrium models, aue static, other dynamic, where technology is determined endogenoussly throug stochastic investment, firms set prices, entry is free and consumers search for prices. I use the static model to discuss market power and price controls and the dynamic model to discuss cost volatility and predation.