Search, Design, and Market Structure

The Internet has made consumer search much easier with consequences for competition, industry structure and product o¤erings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We …nd a polarized market structure, where some …rms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all …rms and consumers are ex-ante identical. We perform comparative statics and show the e¤ect of a fall in search costs on the designs, market shares, prices, and pro…ts of di¤erent …rms. In particular, a fall in search costs, through the e¤ect on product designs, can lead to higher industry prices and pro…ts. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.