Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model

We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the ‘‘Bertrand Paradox,’ ’ the ‘‘Diamond Paradox,’’ and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and hence more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs. 1.