Informational Complementarity

Management Science (Forthcoming)

MIT Sloan Research Paper No. 5510-18

58 Pages Posted: 12 Jul 2018 Last revised: 2 Jun 2019

See all articles by T. Tony Ke

T. Tony Ke

The Chinese University of Hong Kong (CUHK)

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing; Hong Kong University of Science & Technology (HKUST); Hong Kong University of Science and Technology

Date Written: December 21, 2018

Abstract

Many products have similar or common attributes and are thus correlated. We show that when these attributes are uncertain for consumers, a complementarity effect can arise among competing products, in the sense that the lower price of one product may increase the demands for the others. This effect occurs when consumers sequentially search for information about both common and idiosyncratic product attributes prior to purchase. We characterize the optimal search strategy for the correlated search problem, provide the conditions for the existence of the complementarity effect, and show that the effect is robust under a wide range of alternative assumptions. We further explore the implications of the effect for pricing. When firms compete in price, although product correlation may weaken differentiation between the firms, the complementarity effect due to correlated search may raise equilibrium price and profit.

Keywords: search theory, information, complementarity, price competition

Suggested Citation

Ke, Tony and Lin, Song, Informational Complementarity (December 21, 2018). Management Science (Forthcoming), MIT Sloan Research Paper No. 5510-18, Available at SSRN: https://ssrn.com/abstract=3212869 or http://dx.doi.org/10.2139/ssrn.3212869

Tony Ke (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

LSK 4005, HKUST Business School
Clear Water Bay
Hong Kong, Hong Kong, China na
Hong Kong
Clear Water Bay (Fax)

HOME PAGE: http://www.bm.ust.hk/mark/staff/song_lin.html

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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