Search, common knowledge, and competition

This paper analyzes the effects of buyer search costs and incomplete information, private and common knowledge of the sellers, on seller competition. It turns out that small changes in search costs may have large but quantifiable effects on pricing when the seller has good private knowledge about the buyer, but the common knowledge of the buyer valuations is lacking among the sellers. As an application, one can see how the effect of a firm’s information-gathering technology may depend on whether the implemented technology is expected to make the final knowledge of the firms more or less consistent across firms. JEL Classification: C72, D49, D80.