The Impact of Consumer Search Cost on Assortment Planning and Pricing

Abstract

Consumers search for product information to resolve valuation uncertainties before purchase. We incorporate search cost into consumer choice models and study the two-stage consider-then-choose policy. In the first stage, a consumer forms her consideration set by balancing utility uncertainty and search cost; in the second stage, she evaluates all products in her consideration set and chooses the one with the highest net utility. We show that the revenue-ordered assortment fails to be optimal, although it can obtain at least half the optimal revenue. We propose a k-quasi attractiveness-ordered assortment and show that it can be arbitrarily near-optimal for the market share maximization problem. The assortment problems generally are NP-hard, so we develop efficient exact and approximation algorithms for a variety of assortment problems. For the joint assortment planning and pricing problem with homogeneous consumers, we show that the intrinsic-utility-ordered assortment and the quasi-same-price policy, which charges the same price for all products except at most one, are optimal.