Consumer Search and Information Acquisition

Information acquisition is crucial for decision making procedures, in particular, for search. There is vast consumer search literature that study how sellers provide information to the consumers, while consumers' information acquisition is often modeled in an all-or-nothing manner, i.e., once you pay a search cost, you learn everything about the product. Imagine that a consumer searches online in order to purchase a product. The information acquisition procedure might be more complicated in this internet era. Relevant information regarding purchase decision is likely to be more than what one can digest. Consumers have to choose what type of information to process and to what extent to process.

Consumers' information acquisition strategy has implications for sellers' pricing strategy. Price set by the seller affects not only a consumer's surplus but also each consumer's incentive to acquire information. A higher price might encourage or discourage consumers to acquire more information while acquiring more information does not imply higher demand. Therefore, the seller needs to be very careful when determining price when she anticipates that consumers engage in active information acquisition.

We adopt the framework of rational inattention in this project to model information acquisition. Rational inattention captures the phenomenon that humans cannot digest all available information, but can choose which exact pieces of information to attend to. Rational inattention offers a tractable and intuitive way to model information acquisition and is applied to various fields such as finance, trade and political economics. Yet it has not been explored in search where information is abundant. Recent work in all these fields has shown that market outcomes are very sensitive to consumer information acquisition strategies.

A key question in the literature has been to inspect the effect of search cost on price. We would like to investigate how optimal price, seller’s profit and consumer welfare vary with the information acquisition cost. One might also wonder what type of information and how much information consumers gather during the whole process, and how it is influenced by information acquisition cost. More generally, we are curious about how seller's incentive to provide information and consumers' incentive to acquire information interact with each other, and whether platform designer has incentive to intervene.

This project aims to understand the interaction between consumer search, information acquisition and price competition. Moreover, this project points to opportunity for analyzing other relevant problems like marriage market and school match, which also involve similar information acquisition procedure.