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The gatekeeper's optimal fee structure when sellers can price discriminate

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Abstract

We extend the Baye and Morgan (2001) model to study competition between price comparison sites in the information market on the internet. We identify one symmetric sub-game perfect Nash equilibrium in which (1) price comparison sites set the same advertising fees; (2) the same proportion of consumers subscribe to each site; (3) each firm mixes between advertising on all sites and not advertising; and (4) advertised prices are dispersed. The introduction of additional price comparison sites may reduce social welfare and joint profits of price comparison sites. In the equilibrium with each consumer subscribing to one site, as the number of price comparison sites goes to infinity, the information market approaches that without price comparison sites.

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... 13 While our formulation excludes price discrimination between loyals and shoppers, which is consistent with practice, our results would be qualitatively unchanged were one to admit price discrimination. See Morgan (2002) and Nahm (2003) for characterisations of firm behaviour under price discrimination. ...
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... Sundaraijan [3] analyzed optimal pricing and technological protection for a monopolist using price discrimination among customers willing to buy variable quantities of a digital product. Jae Nahm [4] investigated the information gatekeeper's optimal fee structure when sellers can price discriminatingly. Pricing strategies in the network economy based on the customer value were emphasized by Carl and Hal [1]. ...
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... As pointed out in BM, there is also an equilibrium in which firms and consumers simply ignore the information gatekeeper. 13 Nahm (2003) examines a monopoly site's optimal fee structure when firms can price discriminate between consumers who consult the price comparison site and those who do not. He shows that when firms can price discriminate, the monopoly site's optimal advertising fee is zero and firms' advertised prices are not dispersed. ...
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Andrew Sweeting for outstanding research assistance. We also thank Patrick Goebel for a valuable tip on Internet data collection, Steve Ellison for sharing substantial industry expertise, and Drew Fudenberg for his comments. This work was supported by NSF grants SBR-9818524 and SES-0219205. The first author’s work was supported by fellowships from the Center for Advanced Study in the Behavioral Sciences and the Institute for Advanced Study. The second author’s work was We examine the competition between a group of Internet retailers that operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation—practices that frustrate consumer search or make it less damaging to firms—resulting in much less price sensitivity on some other products. We discuss several models of obfuscation and examine its effects on demand and markups empirically. Observed markups are adequate to allow efficient online retailers to survive.
Information gatekeepers on the internet and the competitiveness of homogenous product markets
  • Baye