Multiproduct Pricing and The Diamond Paradox

I show that multiproduct firms suffer less than single-product firms from the “Diamond Paradox”. Equilibrium prices are high because rational consumers understand that visiting a store exposes them to a hold-up problem when they have search costs. However a store with more products attracts more consumers with low valuations, and therefore charges lower prices. Advertising a few products at low prices enables the firm to credibly commit to low prices across the rest of the store. “Loss-leading” can therefore be optimal. If demands are subject to random shocks, prices are shown to move counter cyclically.