Oligopolistic Markets with Sequential Search and Asymmetric Information∗

A large variety of markets, such as retail markets for gasoline or mortgage markets, are characterized by firms offering a fairly homogenous good produced at virtually the same cost. The present paper provides a theoretical examination of this type of market by developing a sequential search model with incomplete information where consumers are uninformed about the underlying production cost. We characterize a perfect Bayesian equilibrium in which consumers follow reservation price strategies and provide a sufficient condition for such an equilibrium to exist. Firms strategically exploit consumers being uninformed about their production cost, and set on average higher prices compared to the standard complete information model. The importance of asymmetric information vanishes, however, when the number of firms becomes very large. Further, we find that expected prices and consumer welfare might be non–monotonic in the number of firms. JEL Classification: D40; D83; L13