Consumer choice, market power, and inflation

We introduce consumer choice into a search-theoretic model of monetary exchange. In contrast to standard search models featuring bilateral meetings, consumers can meet multiple sellers and choose a seller with whom to trade. Market power is endogenized through competitive search and it is influenced by the degree of consumer choice. We consider the effects of greater consumer choice on both market power and the welfare cost of inflation. Surprisingly, we find that greater consumer choice can have a non-monotonic effect on market power. At lower levels of consumer choice, an increase in the degree of consumer choice tends to increase firms’ market power, while the opposite is true at higher levels. When we calibrate the model to U.S. data, we find that despite greater consumer choice having a positive effect on welfare overall, it can also amplify the negative welfare effects of inflation, making it significantly more costly.