Consumer Search and Retail Market Structure

A puzzling feature of many retail markets is the coexistence of large multiproduct firms and smaller firms with narrow product ranges. This paper provides a possible explanation for this puzzle, by studying how consumer search frictions influence the structure of retail markets. In our model, single-product firms that supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and, due to search frictions, value the one-stop shopping convenience associated with a multiproduct firm. We find that, when search frictions are relatively large, all firms are multiproduct in equilibrium. However, when search frictions are smaller, the equilibrium market structure is asymmetric, with different retail formats coexisting. This allows firms to better segment the market and, as such, typically leads to the weakest price competition. When search frictions are low, this asymmetric market structure is also the worst for consumers. Moreover, due to the endogeneity of market structure, a reduction in the search friction can increase market prices and harm consumers.