Simultaneous or Sequential? Search Strategies in the U.S. Auto Insurance Industry

Abstract

We study the identification of the search method consumers use when resolving uncertainty in the prices of alternatives. We show that the search method -- simultaneous or sequential -- is identified with data on consumers' consideration sets (but not the sequence of searches), prices for the considered alternatives and market-wide price distributions are observed. We show that identification comes from differences in the patterns of actual prices in consumers' consideration sets across search methods. We also provide a new estimation approach for the sequential search model that uses such data. Using data on consumer shopping behavior in the U.S. auto insurance industry that contains information on consideration sets and choices, we find that the pattern of actual prices in consumers' consideration sets is consistent with consumers searching simultaneously. Via counterfactuals we show that the consideration set and purchase market shares of the largest insurance companies are overpredicted under the incorrect assumption of sequential search. As the search method affects consumers' consideration sets, which in turn influence brand choices, understanding the nature of consumer search and its implications for consideration and choice is important from a managerial perspective.