A puzzling feature of many retail markets is the coexistence of large multiproduct firms and smaller firms with narrow product ranges. This paper provides a possible explanation for this puzzle, by studying how consumer search frictions influence the structure of retail markets. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products, and due to search frictions value the one-stop shopping convenience associated with a multiproduct firm. We find that when search frictions are relatively large all ?rms are multiproduct in equilibrium. However when search frictions are smaller the equilibrium market structure is asymmetric, with di¤erent retail formats coexisting. This allows firms to better segment the market, and as such typically leads to the weakest price competition. When search frictions are low this asymmetric market structure is also the worst for consumers. Moreover due to the endogeneity of market structure, a reduction in the search friction can increase market prices and harm consumers.
Management Science, vol. 65, n. 6, June 2019, pp. 2607–2623