Directed Search and Competitive Search Equilibrium: A Guided Tour

This essay surveys the literature on directed search and competitive search equilibrium, covering theory and a variety of applications. These models share features with traditional search theory, but also differ in important ways. They share features with general equilibrium theory, but with explicit frictions. Equilibria are often efficient, mainly because markets price goods plus the time required to get them. The approach is tractable and arguably realistic. Results are presented for finite and continuum economies. Private information and sorting with heterogeneity are analyzed. While emphasizing issues and applications, we also provide several hard-to-find technical results. (JEL D50, D83)

Middlemen: A Directed Search Equilibrium Approach

This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why the empirical relationship between middlemen’s premium and their inventory capacity can be positive in some markets (e. g., rental video shops, used-car dealers) and negative in other markets (e. g., supermarkets, theater ticket offices). I also examine the implication of the configuration of middlemen’s market in terms of the size and the number of middlemen for the equilibrium premium with and without free entry.

Equilibrium Price Dispersion with Search Regret Disutility

I examine an extension of the Burdett and Judd ([1983] . Equilibrium price dispersion. Econometrica, 51[4], 955–970) model whereby the consumers with positive search costs experience search regret disutility. First, I focus on the non-sequential search equilibrium in which the said consumers randomize between searching for one price and searching for two prices. When the disutility is significant (a) the spectrum of parameters for which this dispersed price equilibrium can be sustained widens significantly compared to the setting with no disutility; (b) this dispersed price equilibrium is unique and stable in contrast to the multiplicity of dispersed price equilibria of this type which arise in the original model; and (c) in the stable dispersed price equilibrium of this type the consumers with positive search costs respond to the possibility of search regret disutility by increasing their equilibrium search intensity. Second, I concentrate on the noisy sequential search equilibrium in which the reservation price is endogenous. When the search cost takes relatively high values, then compared to the setting with no disutility (a) the set of parameters for which this dispersed price equilibrium is supported may become significantly smaller; (b) the reservation price decreases; and (c) the consumers with positive search costs choose the same search intensity. JEL Classifications: D41, D83