Friday, June 3, 2011
Posted by D. Daniel Sokol
Jidong Zhou (UCL Econ) and Mark Armstrong (UCL Econ) explain Paying for prominence.
ABSTRACT: We investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options. First, firms can affect an intermediary's sales efforts by means of commission payments. When firms pay commission to a salesman, the salesman promotes the product with the highest commission, and steers ignorant consumers towards the more expensive product. Second, sellers can advertise prices on a price comparison website, so that consumers investigate the suitability of products in order of increasing price. In such a market, equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs. Finally, consumers might first consider their existing supplier when they purchase a new product, which suggests a relatively benign rationale for the prevalence of cross-selling in markets such as retail banking.