Endogenous Evaluation and Sequential Search

Consumers may not be perfectly informed of the availability and attributes of competitive offerings (price, match value). We examine equilibrium outcomes when consumers can search among potential options and invest evaluation efforts to resolve product value uncertainty by endogenizing the information structure in the canonical model of sequential search with horizontal differentiation. We show that consumers’ joint decisions on search and evaluation interact in an asymmetric manner. That is, greater evaluation pushes up the search-terminating threshold, whereas a higher stopping threshold first increases and then decreases the incentive for evaluation. As a result, changes in the search/evaluation cost may exert unusual influences on equilibrium behaviors and payoffs. Both the impact of the search cost on optimal evaluation and that of the evaluation cost on expected number of searched products exhibit an inverted U pattern. Because of endogenous evaluation, the equilibrium price and profit can vary nonmonotonically with the search/evaluation cost. This implies that we may observe the coexistence of consumers searching fewer products and firms charging lower prices as sampling becomes more costly. Moreover, consumers can benefit from more costly sampling. We discuss how these findings can shed light on strategic design of shopping environment, user acquisition/retention, and empirical research.