Ordered Consumer Search
01 Oct 2017-Journal of the European Economic Association (Oxford Academic)-Vol. 15, Iss: 5, pp 989-1024
TL;DR: In this article, the authors discuss situations in which consumers search through their options in a deliberate order, in contrast to more familiar models with random search, and show how ordered search can be reformulated as a simpler discrete choice problem without search frictions.
Abstract: The paper discusses situations in which consumers search through their options in a deliberate order, in contrast to more familiar models with random search. Topics include: network effects (consumers may be better off following the same search order as other consumers); the use of price and non-price advertising to direct search; the impact of consumers starting a new search with their previous supplier; the incentive sellers have to merge or co-locate with other sellers; and the incentive a seller can have to raise its own search cost. I also show how ordered search can be reformulated as a simpler discrete choice problem without search frictions.
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TL;DR: In this paper, price formation in a model of consumer search for differentiated products in which consumers have heterogeneous search costs is studied and conditions under which a pure-strategy symmetric Nash equilibrium exists and is unique.
Abstract: We study price formation in a model of consumer search for differentiated products in which consumers have heterogeneous search costs. We provide conditions under which a pure-strategy symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density.
61 citations
TL;DR: In this article, a discrete-choice model with optimal consumer search was developed to explain variability in purchase patterns in the automobile industry using macro-level data on prices, market shares, as well as data on dealership locations and consumer demographics.
Abstract: In many markets consumers only have imprecise information about the alternatives available. Before deciding which alternative to purchase, if any, consumers search to nd their preferred products. This paper develops a discrete-choice model with optimal consumer search. Consumer choice sets are endogenous and therefore imperfect substitutability across brands does not only arise from variation in product characteristics but also from variation in the costs of searching alternative brands. We apply the model to the automobile industry using macro-level data on prices, market shares, as well as data on dealership locations and consumer demographics. Our estimate of search cost is highly signicant and indicates that consumers conduct a limited amount of search. The paper shows that accounting for search cost and its eect on generating heterogeneity in choice sets is important in explaining variability in purchase patterns.
60 citations
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TL;DR: In this article, the authors investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options, and they show that equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs.
Abstract: We investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options. First, firms can affect an intermediary's sales efforts by means of commission payments. When firms pay commission to a salesman, the salesman promotes the product with the highest commission, and steers ignorant consumers towards the more expensive product. Second, sellers can advertise prices on a price comparison website, so that consumers investigate the suitability of products in order of increasing price. In such a market, equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs. Finally, consumers might first consider their existing supplier when they purchase a new product, which suggests a relatively benign rationale for the prevalence of cross-selling in markets such as retail banking.
29 citations
01 Jan 2019
TL;DR: An overview of the recent and growing econometric literature studying how consumers search for products, leading up to more recent work that combines the two approaches by formulating search as the process through which consumers form consideration sets.
Abstract: This chapter provides an overview of the recent and growing econometric literature studying how consumers search for products. We begin with a brief review of theoretical models of search that have been influential in guiding empirical work. We then discuss the marketing literature on consideration sets and early econometric literature on consumer search, leading up to more recent work that combines the two approaches by formulating search as the process through which consumers form consideration sets. The recent literature also offers econometric tests between search methods. We conclude with a discussion of current and potential future directions for work in this area, which we expect to be greatly enriched by the availability of large data sets containing granular information on consumer search behavior across a variety of online and offline contexts.
25 citations
TL;DR: In this article, the authors present a framework to study directed consumer search and show that when consumers observe prices before search, prices and profits are lower than when they do not, and if prices are readily observable, firms also influence search direction by their choice of price.
24 citations
References
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TL;DR: In this article, the authors analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision, and they show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior.
Abstract: We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.
5,956 citations
TL;DR: In this article, the authors argue that consumers lack full information about the prices of goods, but their information is probably poorer about the quality variation of products simply because the latter information is more difficult to obtain.
Abstract: Consumers are continually making choices among products, the consequences of which they are but dimly aware. Not only do consumers lack full information about the prices of goods, but their information is probably even poorer about the quality variation of products simply because the latter information is more difficult to obtain. One can, for example, readily determine the price of a television set; it is more difficult to determine its performance characteristics under various conditions or its expected need for repairs. This article contends that limitations of consumer information about quality have profound effects upon the market structure of consumer goods. In particular, monopoly power for a consumer good will be greater if consumers know about the quality of only a few brands of that good. This is a significant departure from the literature. Economists have long been interested in the determinants of monopoly power, but studies have always concentrated on the production function or market-size variables. I try to show that consumer behavior is also relevant to the determination of monopoly power in consumer industries. Location theory has also ignored the consumer's lack of information. Since many trips to a store are, in part, quests for information, the location of retail stores can be profoundly affected by consumer efforts to acquire information. I shall also try to show that advertising and inventory policy are affected by consumer ignorance about quality differences among brands. All of these impacts of consumer ignorance have remained unexplored because economists have not developed a systematic analysis of consumer quests for information about quality differences. Information about quality differs from information about price because the former is usually more expensive to buy than the latter. Indeed this is one reason we expect the variance in the utility of quality facing a consumer to be greater than the variance in the utility of price. This difference in the price of information can lead to fundamentally
5,548 citations
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TL;DR: It is argued that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
5,412 citations
1,600 citations