Information search in the internet markets: Experience versus search goods

Abstract

Abstract This paper investigates optimal search paths of online shoppers for experience versus search goods, as they engage in continuous sequential search for product information. An optimal stopping rule is designed, based on reservation utilities where the instantaneous utility at each search is modelled as a continuous stochastic process. Furthermore, an empirical model validates the theoretical finding using browsing and purchase data from a Finnish multi-product retailer. The main finding is that, experience goods are associated with three times lower search intensities as compared to search goods. A set of hypotheses investigating varying implications of information search online for the two product groups in question, are tested. A proxy for the agents’ prior information is calculated based on historic search data via novel methodology from the field of information retrieval, such as Text frequency-Inverse document frequency, which exhibits an estimated twelve percent increase in search for search goods, while having no effect on experience goods. Choice probabilities help identify the informativeness of search, which is shown to be inversely proportional to the intensity of search. Finally, the role of personalised recommendations is studied in the context of online search and choice, which has completely opposing effects on the two product types.