Informational Complementarity

Tony Ke, Lin Song

Many products are correlated because they share some similar or common attributes. We show that when these attributes are uncertain to consumers, a complementarity effect can arise among competing products, in the sense that a lower price of one product may increase the demands of others. The effect occurs when consumers optimally search for information about both common and idiosyncratic product attributes prior to purchase. We characterize the optimal search strategy for the correlated search problem and provide the conditions for the existence of the complementarity effect. We further explore the implications of the effect for firm 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.

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