Information Provision and Pricing in the Presence of Consumer Search Costs

Abstract

Should a seller make information about its products readily accessible to customers, so that customers do not have to incur any substantive cost—in terms of time and effort—to learn about those products? To help answer this question, we consider a monopolist selling two substitute products to a population of customers, who have differing tastes about the products. Each customer a priori has uncertainty about whether or not he will like each of the products. The seller may choose to make product information easily accessible, thereby allowing customers to resolve their uncertainties for free. Otherwise, customers may conduct research to resolve their uncertainties by incurring a search cost before making purchase decisions. We consider three “information structures” differing in whether the seller makes information about the products freely accessible or not. Our primary objective is to determine which structure gives the seller the highest revenue, while accounting for the seller’s pricing decisions as well as the induced customer responses to both the information structure and prices. We find that if each customer’s uncertainties are small in magnitude but highly positively correlated, then withholding both products’ information is the best for the seller. If the uncertainties are small in magnitude and negatively correlated, then providing one product’s information but not the other’s is the best. If the uncertainties are large in magnitude and positively correlated, then providing both products’ information is the best. We also show that when the correlation is negative, withholding both products’ information cannot be optimal. In addition, we also analyze various extensions of the model. These include a variant in which customers’ research is imperfect and may yield incorrect information to the customers, and a variant in which each customer’s uncertainty about a product can be decomposed into multiple uncertainties associated with individual attributes of the product.

Quality Disclosure Strategy under Customer Learning Opportunities

“…Liu et al. (2019) find that in the presence of a search cost, the seller may choose to make its product information easily accessible, thereby allowing customers to resolve their product valuation uncertainties for free. A recent review of both quality disclosure and information provision literature is available in Gu and Chen (2019).…”

“…For example, Wang et al (2018) examine the interaction of information provision and pricing decisions for competitive firms, and characterize the equilibrium prices. Liu et al (2019) find that in the presence of a search cost, the seller may choose to make its product information easily accessible, thereby allowing customers to resolve their product valuation uncertainties for free. A recent review of both quality disclosure and information provision literature is available in Gu and Chen (2019).…”

Dynamic Pricing and Information Disclosure for Fresh Produce: An Artificial Intelligence Approach

“…The recent rise of online search/ reviews offers easy access to customers to learn about the quality of products. Liu et al (2019) allow customers to conduct research to resolve valuation uncertainties by incurring a search cost. The authors show that information disclosure depends on customers' uncertainties in their valuations of the product and the magnitude of customers' search costs.…”

“…Our work enriches our understanding of information disclosure when customers have heterogeneous biased perceptions about product quality. A large body of literature has identified factors that affect sellers' disclosure decision (e.g., Liu et al 2019, Zhu et al 2021. We extend the literature by looking at multiple decisions on information disclosure over time, since we are considering deteriorating fresh produce.…”

To Share or Not to Share? The Role of Retailer’s Information Sharing in a Closed-Loop Supply Chain

“…A few studies have shown that manufacturers as participants in the supply chain can also share information in some cases where the manufacturer possesses better demand information than the downstream retailer ( Jiang et al, 2016 ; Zhou et al, 2017 ; He et al, 2018 ). In addition, information sharing may occur between retailers and consumers ( Liu Y. et al, 2019 ). Absolutely, some studies look at information sharing within an enterprise where the sales department is responsible for forecasting demand and the operations department is responsible for ordering ( Scheele et al, 2018 ).…”