Consumer Search and Price Competition

Abstract

We consider an oligopoly model in which consumers engage in sequential search based on partial product information and advertised prices. By applying Weitzman's (1979) optimal sequential search solution, we derive a simple static condition that fully summarizes consumers' shopping outcomes and translates the pricing game among the sellers into a familiar discrete-choice problem. Exploiting the discrete-choice reformulation, we provide sufficient conditions that guarantee the existence and uniqueness of market equilibrium and analyze the effects of preference diversity and search frictions on market prices. Among other things, we show that a reduction in search costs raises market prices.

Optimal Search and Awareness Expansion

“…This result generalizes the eventual purchase theorem of Armstrong (2017) and Choi et al (2018) to the case where the consumer has limited awareness. The generalization follows from the following implication of the optimal policy: Whenever both the search and the purchase value of a product in the awareness set exceed the expansion value, the consumer will buy the product and end the search.…”

“…This allows deriving market demand without having to consider the multitude of possible choice sequences that otherwise make aggregation difficult. Besides, this result generalizes the eventual purchase theorem of Choi et al (2018) to the case of limited awareness. 2 Based on these technical results, I discuss two implications of limited awareness.…”

“…To simplify exposition and facilitate a comparison to existing models from the consumer search literature (e.g. Armstrong, 2017;Choi et al, 2018), I assume that the consumer's ex post utility when purchasing alternative j is given by…”

“…To keep exposition clear and facilitate a comparison with recent consumer search models (e.g. Armstrong, 2017;Choi et al, 2018), I present the search and awareness expansion problem using assumptions that then are relaxed in several extensions. Cases where a reservation value policy continues to be optimal include environments where (i) alternatives are ranked in decreasing order of expected utility, (ii) awareness expansion reveals an unknown number of alternatives, and (iii) multiple awareness expansion technologies are available.…”

“…The first term in the effective value then is equivalent to whatChoi et al (2018) define as effective value. AsChoi et al (2018) show, it fully characterizes the purchase decision conditional on the awareness set.…”