The Importance of Price Beliefs in Consumer Search

Abstract

A consumer’s decision to engage in search depends on the beliefs the consumer has about an unknown product characteristic such as price. Given beliefs are rarely observed, researchers typically assume that consumers have rational expectations or update beliefs consistent with Bayesian updating. These assumptions are not only restrictive, but additionally, do not afford the researcher, or the retailer, an opportunity to price discriminate among consumers based on heterogeneity in beliefs. We first show, through Monte Carlo experiments, how these assumptions impact estimates of search cost. Next, we design an incentive-aligned online study where subjects search over the price of a homogeneous good, and we elicit distributions of price beliefs before and after each search. Based on data collected from a nationally representative panel, we find substantial heterogeneity in prior price beliefs. We find that subjects update their beliefs in response to search outcomes, but they deviate from Bayesian updating in that they under-react to new information. Importantly, we show that (i) assuming Bayesian updating does not significantly bias search cost estimates at the aggregate level provided the researcher accounts for heterogeneous prior beliefs, (ii) eliciting heterogeneity in prior expected prices is much more important than eliciting heterogeneity in prior price uncertainty, and (iii) a retailer can increase profits through third-degree price discrimination by recognizing the heterogeneity in prior beliefs.

Enhancing Sustainable Business Models for Green Transportation

“…It is important to understand the underlying motives regarding the process of a consumers' search [59]. Assuming rational expectations implies that customers' beliefs are homogeneous, which can extenuate the retailers' need to discriminate the price based on heterogeneity beliefs [59].…”

“…It is important to understand the underlying motives regarding the process of a consumers' search [59]. Assuming rational expectations implies that customers' beliefs are homogeneous, which can extenuate the retailers' need to discriminate the price based on heterogeneity beliefs [59]. Customers are stimulated by environmental factors (economic, technological, political, and cultural) and by marketing stimuli such as advertising, discounts, etc.…”

Dynamic pricing strategies for multi‐type knowledge payment products: A system dynamics approach

“…Shen et al (2023) found that prestige can positively influence the valuation and negotiation of technology while in turn can affect pricing. Belief pricing refers to the deliberate avoidance of numbers with negative connotations when pricing products in different cultural environments (Jindal & Aribarg, 2021). For example, in China, some producers avoid using the number "4.…”

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“…That is, while inattentive participants often behave randomly, which adds noise to the data and ultimately reduces data quality (Berinsky, Margolis, and Sances 2014;Berinsky et al 2021;Goodman, Cryder, and Cheema 2013), there is abundant evidence that in the real world, people's attention spans are limited (Caplin and Dean 2015). People often do not pay attention in natural environments (Jindal and Aribarg 2021), so why should lab experiments be restricted solely to those who do?…”

“…2021; Goodman, Cryder, and Cheema 2013), there is abundant evidence that in the real world, people's attention spans are limited (Caplin and Dean 2015). People often do not pay attention in natural environments (Jindal and Aribarg 2021), so why should lab experiments be restricted solely to those who do?…”