Search and Ripoff Externalities

Jul 2014 | 715

Authors: Mark Armstrong

This paper surveys models of markets in which some consumers are "savvy" while others are not.  We discuss when the presence of savvy consumers improves the deals available to non-savvy consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for savvy consumers (ripoff externalities).  We also discuss when the two groups of consumers have aligned or divergent views about market interventions.  The analysis covers two overlapping families of models: those which examine markets with price/quality dispersion, and those which exhibit forms of consumer hold-up.

JEL Codes: D03, D18, D43, D83

Keywords: Consumer protection, consumer search, price dispersion, hold-up, add-on pricing

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