PROMINENCE AND MARKET POWER: ASYMMETRIC OLIGOPOLY WITH SEQUENTIAL CONSUMER SEARCH

Abstract

This article presents a new perspective on the nature of market power through the lens of firm prominence. We build a model of oligopolistic price competition with sequential consumer search, showing that a larger firm sets a higher price than its smaller competitors. Consumers are more likely to encounter sellers from a larger firm both immediately and in future interactions, resulting in less-elastic demand for that firm. Small firms can free-ride on the prominent firm's market power to raise their prices and earn higher profits. The Herfindahl–Hirschman Index provides a useful guide for welfare evaluation.