Order-specific Consumer Search, Price Competition and Platform Design

Traditional consumer search literature assumes that the search cost occurs to a consumer when she visits a seller is independent of her search order. This assumption has broad application as for example, when consumers visit physical stores to purchase products, transportation cost and time is unavoidable and invariant of her search order. However, this assumption prevents economists to from studying an equally relevant environment where consumers incur search costs that are associated with her search order.

Imagine that a consumer surfs on Amazon in order to purchase a digital camera. Distinct pages on Amazon may not induce different search costs since one only needs to click the page and browse around. Nevertheless, it is very likely that a consumer becomes increasingly exhausted after clicking and acquiring information from several product pages. One may wonder how consumers would determine their search order given that they know their pattern of search costs. Which seller should be assigned a lower search cost? Which seller will consumers visit first based on consumers’ assignment of search costs among the sellers? A key question in the literature has been to analyze how consumers decide the order of visiting the sellers and at which point they optimally stop. When search costs are independent of search order, consumers made their decisions based on each seller’s search cost and potential product value. When search costs are associated with each consumer’s own search order, consumers are the ones to decide which store bears how much search cost.

More generally, one may wonder if there is a platform designer behind, who is free to pair sellers with search costs, how would he design the search environment to optimize consumers’ search process or other objectives such as to maximize consumers’ time spent on the site. Furthermore, a seller’s pricing decisions would be affected by such search design and in turn influence the optimal design. How the central comparative statics question in the search literature on the effect of search cost on prices might deliver a different answer as it is in the classical literature is also of interests.

The objective of this project is to provide solution to this technical problem and derive concrete advice for consumers and online platform designers. I plan to document these results and implications in at least one international refereed journal article, and present these them in multiple conferences.