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Search, design, and market structure

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The Internet has made consumer search easier, with consequences for prices, industry structure and the kinds of products offered. We explore these conse- quences in a rich but tractable model that allows for strategic design choices. A polarized market structure results, where some firms choose designs aimed at broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We analyze the e¤ect of reduced search costs and find results consistent with the reported prevalence of niche goods and the long-tail and superstar phe- nomena. In particular, the model suggests that long-tail e¤ects arise when there is a wide range of potential designs, relative to vertical heterogeneity among firms.

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