Competitions from the Product Line in a Consumer Search Model

Abstract

                       This study aims to investigate the competitions from the product line when consumers search among two multiproduct firms for differentiated products. In the first model, a firm is created to be prominence that will be sampled first by all consumers. Firms compete in product line to insure certain utility to the consumers. Prominent firm earns higher profit, charges a lower price and provides longer product line. A counter intuitive result shows that the prominent firm’s product line increases with the search cost. This model does not support the role of product line to enhance pricing power.

                   The model is further modified that consumers freely choose which the firm they will visit first. The product line serves the second role to create firm’s saliency in consumer’s memory. The firm with lower production cost can raise attention more easily and extends longer product lines. This salient firm maintains higher profit, and charges a higher price compared with its less-salient rival. With harder search, consumers face more brands with higher prices. In the social welfare perspective, we find that all social optimal product lines and prices are lower than those determined to maximize profits. Since firms need to gain the attentions, they over invest in product lines.