A model of directed consumer search

• Published in: International journal of industrial organization Vol. 61; pp. 223 - 255
• Main Authors: Haan, Marco A., Moraga-González, José L., Petrikaitė, Vaiva
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.11.2018
• Subjects: Directed consumer search; Directed consumer search; D83; L13
• ISSN: 0167-7187
• DOI: 10.1016/j.ijindorg.2018.09.001

•We present a consumer search model where search is directed.•Firms can influence the order of search by adjusting prices.•Price observability leads to lower prices and profits; equilibrium prices and profits decrease in search costs.•Consumer surplus increases in search cost when search cost is initially low; otherwise, consumer surplus may fall. We present a framework to study directed consumer search. Firms sell products with two attributes. One is readily observable, the other is observed only after visiting a firm. Search is directed as the order of search is influenced by the observable characteristics. Moreover, if prices are readily observable, firms also influence search direction by their choice of price. We show that when consumers observe prices before search, prices and profits are lower than when they do not. A lower price then not only retains more consumers, but is also more likely to attract them; the latter effect makes demand more elastic. When consumers observe prices before searching, prices decrease in search costs. Consumer surplus initially increases in search costs, but may ultimately decrease.