Essays on Consumer Search Cost and Firms' Mixed Pricing Strategy
Date of Award
Olin Business School
Doctor of Philosophy (PhD)
A full equilibrium approach is proposed in this paper to estimate the distribution of consumer price search costs when (i) consumers adopt sequential or non-sequential search strategy and, (ii) consequently firms adopt a mixed pricing strategy. We model jointly the distributions of prices and sales when the market is at equilibrium. The major methodological challenge is that we have to model the distribution of prices instead of a single optimal price. To solve this problem, we use the non-parametric Maximum Empirical Likelihood estimator (Owen 1988) in model estimation. Through a series of simulation studies, we show that modeling the interplay between firms' pricing strategy and consumers' price search strategy is critical in order to correctly infer the search cost distribution. Finally, we apply the method to a dataset provided by a firm in a B-to-B market, and find that our model can explain the observed variation in prices and transactions, and recover reasonably well the supply cost of the firm.
In this paper we empirically examine the effect of buyers' cost of price search on firms' pricing strategy in a B-to-B market. We propose a full equilibrium approach to simultaneously model the observed price variation and transactions in the market, where buyers engage in costly price search and as a result firms adopt a mixed pricing strategy. Estimation results provide evidence that buyers in our data sequentially sample prices as this model out-performs another classical non-sequential search model in terms of recovering the ``kink" price distribution (probability mass being highly concentrated at some price points) and the true supply cost in our data. We then illustrate how a lower search cost distribution (lower mean) can support a mixed price equilibrium with a higher average price, suggesting that the common belief of lower search costs leading to lower prices can be misleading. Finally, we extend our model framework to study how keyword search advertising may influence firms' prices and profits. By placing advertisement at the top of a search page, we assume an advertiser differentiates from other firms as the first place to start searching for some buyers. We find that the advertiser will charge the lowest price when the proportion of buyers using keyword search is from small to medium but, as the proportion further increases it will eventually charge at the highest price. Measuring the profit difference between the advertiser and non-advertising firms will help infer the willingness-to-pay for search advertising.
Chair and Committee
Tat Y. Chan
Narasimhan Chakravarthi, Sherif Nasser, Juan Pantano, Seethu Seetharaman, Ying Xie
Zhang, Xing, "Essays on Consumer Search Cost and Firms' Mixed Pricing Strategy" (2013). Arts & Sciences Electronic Theses and Dissertations. 262.