Information Provision and Revenue Management in the Presence of Consumer Search Costs

Abstract

Should a seller make information about its products readily accessible to customers, so that customers do not have to incur any substantive cost — in terms of time and effort — to learn about those products? To help answer this question, we consider a monopolist selling two substitute products to a population of customers, who have differing tastes about the products. Each customer a priori has uncertainty about whether or not he will like each of the products. The seller may choose to make product information easily accessible, thereby allowing customers to resolve their uncertainties for free. Otherwise, customers may conduct research to resolve their uncertainties by incurring a search cost before making purchase decisions. We consider three “information structures” differing in whether the seller makes information about the products freely accessible or not. Our primary objective is to determine which structure gives the seller the highest revenue, while accounting for the sellers’ pricing decisions as well as the induced customer responses to both the information structure and prices. We find that, if each customer’s uncertainties are small in magnitude but high in correlation, then withholding both products’ information is the best for the seller. If the uncertainties are small in both magnitude and correlation, then providing one product’s information but not the other’s is the best. If the uncertainties are large in both magnitude and correlation, then providing both products’ information is the best. We also show that when the correlation is low, withholding both products’ information cannot be optimal. We further verify the robustness of our results by conducting numerical experiments for various extensions of the model.