Search Direction

Abstract

A tractable model of pricing under directed search is proposed and integrated with a position auction for better slots (which rationalizes the consumer search order). Search is always inefficiently low because firms price out further exploration. Equilibrium product prices are such that the marginal consumer's surplus decreases in the order of search. Consumers always find it optimal to follow the order of search that results from whatever allocation rule used to determine firms' positions. optimal rankings that achieve the maximization of joint profit, social welfare or consumer surplus are characterized by means of firm specific scores. In a generalized second price auction, any equilibrium that satisfies a \no-envy" condition always implements the joint profit maximizing order and such an equilibrium is shown to exist for a wide range of param- eters characterizing product heterogeneity.