Search costs decrease prices in a model of spatial competition

Abstract This paper examines the Nash equilibrium prices of stores in a spatial search model. By assumption, a large store is certain to have the particular product a consumer wants, whereas a small store has it with probability w. Large and small stores alternate with each other on a circular roadway. Consumers must search by visiting stores. In the Nash price equilibrium, large stores charge higher prices than small stores. Perhaps surprisingly, all Nash equilibrium prices are lower than in the corresponding perfect-information-no-search model (for a given value w). This last result is also demonstrated in a model with only small stores.