High Search Costs Research Articles

Active Versus Passive Loyalty: A Structural Model of Consideration Set Formation

We offer an econometric framework that models a consumer's choice decision as a two-stage process: set formation followed by selection from the brands in the The proposed structural model of set is motivated by the fact that consumers have limited information-acquisition ability. In the context of frequently purchased products (FPPs), since these product categories are characterized by frequent price promotion of varying depths of discount, a faces significant uncertainty about the net utilities associated with the different brands. Thus, while a might know the range of potential prices, she is unaware of the actual posted price of a on any given purchase occasion unless she engages in pre-evaluation price search. Since information acquisition is costly, she needs to first decide how many and which brands to search the posted prices of. In the proposed framework, the process of pre-evaluation price search is conceptualized as brand and the set of sampled brands is referred to as the consumer's consideration set. A distinctive feature of the proposed specification is that it allows us to distinguish between two sources of state dependence - viz., passive and active loyalty. In this conceptualization, passive loyalty refers to state dependence arising out of consumer lock-in as a result of high search cost. Thus, a passively loyal repeatedly buys the same over successive purchase occasions because her cost of searching the posted prices of other brands is very high i.e. her optimal set does not include any other brand. In contrast, active loyalty refers to state dependence arising out of a high intrinsic preference for the selected brand. Thus, while an actively loyal considers more than the selected on any purchase occasion (because her search costs are low), she nonetheless buys the same because of her high intrinsic preference for the brand. Our key theoretical results are as follows: (i) relative to low price sensitive consumers, high price sensitive consumers have larger sets; (ii) the intensity of search is higher in product categories characterized by greater price variability. Thus, more frequent price promotions with deep discounts lead to large sets; and, (iii) a does not stay in the state of inertia for long. In the case of a passively loyal consumer, we will observe phases of inertia followed by a switching that in turn is followed by another spell of inertia. We use scanner panel data for liquid detergents to empirically validate the model. The key empirical results are as follows: (i) there are significant search costs that consumers incur in discovering the actual posted prices of the brands at the store. This implies that consumers do not consider (i.e. search the posted prices of) all the brands on a shopping trip; (ii) in-store display activities and feature ads reduce search costs for a thereby significantly increasing the probability of the being considered. Feature advertising reduces the search costs more than in-store displays; (iii) prior consumption influence quality perception of a for both liquid detergents and ketchup categories. However, consumption experience yield only limited additional quality information; and, (iv) estimates of price sensitivity critically depend on whether the specification explicitly models stage. In particular, a model that assumes that consumers search all the brands on all purchase occasions seriously underestimates the impact of price on choice decision. We also conduct a limited cross-category analysis using ketchup data set and find several interesting differences in price search behavior across the two product categories analyzed.

Women's health and the internet: understanding emerging trends and implications

Internet has become a major information source, yet little is known about why women use the internet for obtaining health information. In this paper, we propose and test three exploratory models to explain internet use for obtaining health information: health and wellness model, health needs model, and search costs model. The health and wellness model is based on the notion that internet has become such an integral part of daily life that health-conscious women use the internet in a pro-active manner for health promotion. The health needs model posits that women with greater health needs or concerns are more likely to use the internet. Finally, the search costs model explores the idea that women may view the internet as a resource for reducing high information search costs. These models were tested using data collected through telephone surveys of women in three southern New Jersey counties in the USA. Consistent with expectations, our findings show that internet use to search for health information is greater among women with higher levels of income and education. There is support for all three models, with surprisingly strong support for the health and wellness model. We conclude that women increasingly rely on the internet to supplement health information received from traditional sources and discuss the implications of our findings for policymakers and health professions.

Market Mechanism Choice and Real Estate Disposition: Search Versus Auction

We propose a model of mechanism choice in the disposition of real estate assets where we consider two alternatives: a search market and an auction. Within the search framework, we derive an equilibrium whereby buyers incur search costs and sellers incur holding costs for the period during which the property is not sold. In the auction alternative, the seller joins an existing pool of sellers in undertaking a multiple–object auction and pays a commission upon sale. Buyers and sellers freely choose their mechanisms, which in equilibrium are optimal given each group’s conjectures about the mechanism choice of their counterpart. In equilibrium, an agent cannot benefit from deviating from his choice and each agent’s beliefs are consistent with the equilibrium outcome. It is shown that (a) buyers with high search costs will choose auctions because the auction payoff imposes an upper bound on buyers' gains from search, and (b) prices at auctions will be higher. Using vacant lot sales data and a method–of–moment estimator which accounts for the presence of an endogenous discrete mechanism choice variable, we estimated a hedonic regression to detect the price effect. It was determined that, on average, lots sold for $1.44 per square foot more in auctions than in the search market, as predicted by our model.

A “New Institutional Economics” Approach to the Reliability of Street-Level Drug Transactions

One issue that has emerged from the study of the operation of illicit-drug markets is the question of how these markets avoid collapsing into anarchy, as neither drug users nor drug dealers can call on the police and courts to enforce the terms of transactions. Recent advances in economic theory, collectively known as New Institutional Economics (NIE), are used to identify informal market institutions that might help sustain reliable transacting in street-level drug markets. High search costs in street-level drug markets compared with legal markets is identified as an environmental factor that may encourage exchange parties to honor the terms of illicit-drug transactions even though there is no third-party enforcement. High search costs may also account for the high levels of quality fraud reported in illicit-drug markets.

When Shopbots Meet Emails: Implications for Price Competition on the Internet

When Shopbots Meet Emails: Implications for Price Competition on the Internet

When Shopbots Meet Emails: Implications for Price Competition on the Internet

When Shopbots Meet Emails: Implications for Price Competition on the Internet

Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model

We study price competition in the presence of search costs and product differentiation. The limit cases of the model are the Bertrand Paradox, the Diamond Paradox, and Chamberlinian monopolistic competition. Market prices rise with search costs and decrease with the number of firms. Prices may initially fall with the degree of product differentiation because more diversity leads to more search and more competition. Equilibrium diversity rises with search costs, while the optimum level falls, so entry is excessive. The market failure is most pronounced for low preference for variety and high search costs.

Publication of Information and Market Response: The Case of Airline on Time Performance Reports

This paper investigates market response to publication of on time performance information. Theory suggests that reduction in search costs generates more honest airlines and better quality service, a distribution of price-quality bundles, increased demand, exit by inefficient airlines and reduction of price rigidity. An ARIMA study of U.S. domestic airline operations finds that after publication of performance information the market generated better performance, increased quality distribution, enhanced demand, exit by four of fourteen airlines and reduced price-quality rigidity. Publication of information may improve performance in markets characterized by asymmetric information and high search costs.

Bargaining and Search with Incomplete Information about Outside Options

This paper considers a model of bargaining in which the seller makes offers and the buyer can search (at a cost) for an outside option; the outside option cannot be credibly communicated, and the seller's offer is recallable by the buyer for one period. There are essentially two equilibrium regimes. For sufficiently high search cost, the game ends immediately; otherwise the search occurs in equilibrium. Compared to the case where the buyer can communicate his outside option, the seller is worse off, and the game results in search for a smaller set of values of the search cost, i.e., less equilibrium delay.C72.

Female Mate Choice Tactics in A Resource‐Based Mating System: Field Tests of Alternative Models

In this study we test theoretical models of female mate choice tactics in natural populations of pine engravers, Ips pini (Say) (Coleoptera: Scolytidae), a species with a resource-based mating system and high search costs. We first develop distinguishing predictions for each of four models of mate choice: random, comparison tactics, and fixed and adjustable thresholds. These predictions relate to commonly collected field data that include the visiting behavior of females and the quality of accepted and rejected mates. Using these types of data, we conclude that pine engravers use an adjustable threshold mate choice tactic because females often accepted the first male encountered, rarely revisited males, visited similar numbers of males in patches of different quality, accepted higher-quality males than those they rejected even on their first encounter with a male in a patch, and had higher acceptance thresholds in high-quality patches than in low-quality patches. This adjustable threshold tactic is consistent with a one-step decision rule and is predicted to occur in species such as pine engravers in which search costs are high and females have information about patch quality before beginning a search in a patch.

Search Costs and Price Dispersion in a Localized, Homogeneous Product Market: Some Empirical Evidence

Convenience stores provide an opportunity to compare the price dispersion that occurs for gasoline, which is characterized by relatively low search and information costs to consumers, with that of in-store items, which are characterized by relatively high search and information costs to consumers. The results obtained from this study support the hypothesis that differences in search and information costs for consumers play a significant role in explaining the observed price dispersion that occurs for homogeneous items sold at convenience stores.

Capitalization of Brokerage Commissions: The Case of Nonlocal Buyers and Sellers

Brokerage services have long been an integral part of property exchanges; yet, our understanding of how brokerage services influence sales prices of properties is quite limited. While recent papers have advanced the much needed theory on this and related questions, the empirical evidence is modest and comes only from single family residential property markets. This study provides new evidence from Ocean City, Maryland summer vacation condiminium markets. Because the majority of the property owners and potential buyers in resort towns are not permanent residents of these towns, both parties may face high search costs and, as a result, prefer to recruit a broker. This increased demand for brokerage services may potentially increase the extent of capitalization of brokerage commissions into property sales prices in the form of higher broker-assisted property prices. On the other hand, homogeneity of the properties should reduce uncertainty about prices, making it more difficult to pass on commissions to buyers. This study reports evidence of full capitalization of brokerage commissions in the Ocean City, Maryland summer vacation condominium markets.

Closing the regional equity capital gap: The role of informal venture capital

There is evidence from a number of countries that small firms encounter a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital industry has done little to fill this “equity gap” on account of its preference for making large investments in established companies and management/leveraged buyouts. Moreover, the supply of venture capital exhibits a high level of spatial concentration. Initiatives by state/provincial and local governments, most notably in economically lagging regions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costly, solution. A more appropriate approach to increasing the supply of start-up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market. Informal investors, or “business angels”, are private investors who provide risk capital directly to new and growing businesses in which they have no family connection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. There is also considerable scope for expanding the population of business angels. The most cost-effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market, namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.

Male philopatry confers a mating advantage in the migratory collared flycatcher, Ficedula albicollis

Abstract. The potential benefits of philopatry versus dispersal were investigated in yearling males of the migratory collared flycatcher on the island of Gotland, Sweden. Data on mating success from 4 years showed that philopatric males (i.e. hatched in the nestbox plot) mated more quickly after arrival than immigrant males and were less likely to remain unmated. Among mated males, however, there was no significant difference in reproductive success between philopatric and immigrant males. Data on nestbox preferences gathered from 8 years revealed that philopatric males on average chose higher-ranked boxes than immigrant males. Male mating success was associated with the preference score of the nestbox, suggesting that the observed mating advantage of philopatric males was probably a consequence of the higher quality of their nest site. It is suggested that prior local experience facilitates nest site selection in philopatric birds when high search costs force individuals to choose between a small number of alternative sites. Dispersal may partly be a consequence of prohibitively high time costs of searching and finding the way back home. Male-biased philopatry in the collared flycatcher may then be a result of a sex-difference in the time costs of searching for and assessing alternative sites.

Rent control with rationing by search costs: A note

This note derives the long-run implications of rent controls when rent-controlled apartments are implicitly rationed to tenants who are more efficient in searching for apartments in the controlled sector. Rent controls are shown to involve transfers that essentially are from some to other tenants, as well as dead-weight losses due to higher search costs that are borne by tenants. Key to this analysis is the condition that, at the margin, rent plus the higher cost of search for a rent-controlled apartment must equal rent in the noncontrolled sector.

Empirical tests of real estate market efficiency

Recent empirical research using real estate data has supported the weak and semi-strong forms of the efficient markets hypothesis. Previous studies have not included an estimate of expected appreciation into the tests of market efficiency, thus raising a question about the reliability of the results. We first use a market model to test for market efficiency with results similar to those reported by others. We next use a dynamic multiple indicator, multiple cause (DYMIMIC) model, which extracts a vector of expected appreciation from the price data, to test market efficiency. This approach produces superior results and a stronger conclusion about the efficiency of housing markets. The results indicate limited adjustment delays which can be explained by the existence of high transactions and search costs.

Endogenous Availability in Search Equilibrium

bargaining power by shopping at two firms and then bringing those firms into competition with one another. Knowing this, firms adjust quoted prices to keep customers from exercising this option. We compare equilibrium prices and availability, firm profits, and customer welfare under duopoly with those that would obtain under monopoly. Wefind that for low levels of (exogenous) customer search costs, duopolists provide lower prices and lower availability, while for high customer search costs, duopolists provide the same price but greater availability than would a monopolist.

Liquidity and the 1987 stock market crash

T he Crash of October 1987 was a puzzling event puzzling not only for what happened on October 19, but also for what subsequently did not happen. In spite of the magnitude and momentum of the crash, its effect was limited primarily to the financial markets, while the economy as a whole did not change its course. And, although the ”bad news” that was supposed to be predicted by the crash has apparently not materialized, the market suffered a lasting decline after October of 1987. This article advances a liquidity theory of the crash, proposing that the price decline in October 1987 reflects, at least in part, a revision of investors’ expectations about the liquidity of the equity markets. Amihud and Mendelson [1986a, 1986b, 19891 have shown that the market price of stocks is positively associated with their liquidity (after controlling for risk). Given this relationship, when the liquidity of assets turns out to be less than had been expected, their price should decline. We suggest that the main news that caused the prolonged decline in stock prices was the crash itself that is, the realization that financial markets are not as liquid as previously assumed. Investors recognized that stock prices should reflect a larger discount for the costs of illiquidity, which turned out to be much higher than had been expected before the crash. Partial recovery following the crash reflects an upward reevaluation of the liquidity of the markets -that is, investors recognized that while the markets are not as liquid as had been assumed prior to the crash, they are also not as illiquid as when there was the possibility of closing the markets altogether. These illiquidity problems, reflected in wider spreads between the quoted bid and ask prices, have persisted long after the crash, and market impact estimates have stayed significantly larger than they had been prior to the crash.’ Thus, the crash and subsequent events have produced new information about the markets themselves rather than fundamental news about the economy. Part of the liquidity-related price decline on October 19, 1987, was temporary. Unexpected sale pressure, even absent any negative information, can generate a temporary negative price impact, as we sometimes observe in block sales. But much of the effect was permanent. Investors realized that they may well have to pay a larger discount when they wish to sell stocks in a hurry. These illiquidity costs result in a stream of future cash outflows that translate into a loss of value.2 In general, illiquidity reflects the difficulty of converting cash into assets and assets into cash, or the costs of trading an asset in the market. Some of the costs of illiquidity are explicit and easy to measure, while others are more subtle. These costs include the bid-ask spread, market-impact costs, delay and search costs, and brokerage commissions and fees. These components of illiquidity cost are highly correlated: Stocks that have high bid-ask spreads also have high transaction fees and high search and market-impact costs, and are thinly traded (McInish and Wood [1989]). When the bid-ask spread widens, it signals that immediacy of execution is more costly,

Bargaining, Search Costs and Equilibrium Price Distributions

This paper studies a bargaining model of equilibrium price distributions. Consumers choose a seller at random and face search costs to switching to another store. In the market equilibrium, the prices at all stores are determined simultaneously as the perfect equilibrium of a bargaining game. In this game, the buyer has the outside option to search for another seller. Differences between the sellers' types create price dispersions; typically the number of active sellers increases with higher search costs. The market equilibrium converges to the competitive equilibrium under perfect information when search costs become small.

Optimal Egg Size and Clutch Size: Effects of Environment and Maternal Phenotype

In this paper, we develop a series of models for predicting optimal egg size and clutch size in different environments and for different maternal phenotypes. The models investigate the interaction between three components of fitness: (1) the intrinsic effect of egg size, (2) the density effect, the effect of the density of competing offspring (including competition with sibs and with non-sibs), and (3) the hierarchy effect, the effect of egg size relative to the sizes of competing eggs laid by other females. The environmental effects that we consider are the intensities of sib and non-sib competition, the number of egg-laying females, and some aspects of seasonal development. The particular aspects of maternal phenotype examined are foraging efficiency and the gametic reserve available at the time of egg laying (broadly equivalent to female size). Regarding environmental effects, increasing intensities of sib competition select for the production of smaller clutches of larger eggs, and increasing intensities of non-sib competition select for even smaller clutches of even larger eggs. We show, however, that this occurs because viability depends on egg phenotype, not because competition depends on density. In addition, we show that in seasonal environments the production of smaller clutches of larger eggs is favored by slower rates of preadult development and shorter overall season lengths. Regarding maternal phenotype, we derive the following conclusions. The intrinsic effects of egg size promote the production of eggs of a constant size by all females, so that larger females lay larger clutches. Sib competition (considered a density effect with no hierarchy component) favors constancy of clutch size for all females, so that larger females lay larger eggs. If, however, sib competition is coupled with circumstances in which females have high gametic reserves and/or low search costs for future oviposition sites, egg size and clutch size should vary with respect to female size, but larger females should lay more clutches. Non-sib competition acting through total competitor density (the density effect) favors the production of a constant clutch size by all females, such that larger females lay larger eggs. The action of non-sib competition on egg size relative to the sizes of others' eggs (the hierarchy effect), although tending to increase egg size overall, may cause smaller females to produce eggs larger than those produced by larger females. This latter effect, however, is confined to cases in which there are few competing females; typically, the hierarchy effect will favor approximately constant egg sizes for all females, so that larger females lay larger clutches.