Asymmetric Consumer Search and Reference Prices

Abstract

One suggested rationale for asymmetric price adjustments by firms is that firms are responding to asymmetric search behavior by consumers. Empirical evidence of asymmetric consumer search is limited due to the difficulties in observing search behavior, but theoretical models assume this asymmetric consumer search is generated by imperfect consumer information about the price distribution and/or heterogeneous costs of search. I demonstrate that asymmetric search occurs after a shift in the price distribution even when subjects know the price distribution and face a common cost of search, with consumers who face an upward shift in prices significantly more likely to search than those who face a downward shift in prices. Although the features of the search environment do not provide any theoretical predictions of asymmetric search in a standard framework, a model of reference-dependent preferences in which consumers view potential purchases as 'losses' or 'gains' relative to a reference price can generate predictions of asymmetric search that explains the response to price changes. Empirical results incorporating the previous purchase price as the reference price provide support for the reference price explanation.