On Search and Showrooming

ECONOMICS AND DECISION SCIENCES DEPARTMENT

Speaker : Sandro SHELEGIA (Univ. Pompeu Fabra)

HEC Campus- Building T - Room T022

Abstract :

We present a model of consumer search that features showrooming as equilibrium behavior; that is some (but not all) consumers visit stores that offer many products which are imperfect substitutes, and then purchase their preferred product elsewhere. Such equilibrium behavior, thus relies on heterogeneous store offerings (broad and narrow product ranges) and, also, as we show heterogeneous consumers. In equilibrium showroomers are consumers with low costs of visiting stores but high preference for variety (“choosiness”). Showrooming is shown to occur in equilibrium when there are relatively few showroomers. Showrooms put upward pressure on prices elsewhere (at narrow range stores) because they populate the market with consumers who know their preferences, in the style of the Diamond paradox (Diamond (1971)). We then introduce an online platform that cannot provide product discovery but whose prices are readily available (e.g. amazon.com). If the platform offers cost economies for showrooming, its introduction lowers prices for consumers who buy at showrooms which are forced to lower their prices. The platform has a second, unambiguous but indirect effect on prices: by attracting all the showroomers its presence intensifies price competition among narrow range stores, which leads to lower prices at the narrow range stores and everywhere. Upstream manufacturers concerned about the participation of consumers and the total industry profits generated by them might, therefore, seek to affect the variety of available retail outlets in the absence of direct restraints on prices.