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Sequential Search with a Price Freeze Option: Theory and Experimental Evidence

Author

Listed:
  • Emanuel Marcu
  • Charles N. Noussair

Abstract

We study the economics of price freeze options (PFOs), by introducing them into a model of sequential search. The model makes a number of predictions, which we test in a laboratory experiment. The experiment varies (1) whether freezing is possible or not, (2) the cost of freezing, and (3) the length of the time horizon. We find that the observed treatment effects are consistent with the predictions of our model, though on average searches are terminated earlier than predicted. Interestingly, the extent of under-searching is magnified by the presence of an affordable PFO. We also show that while under-searching is relatively harmless at the individual level, it can lead to welfare losses in the long run.

Suggested Citation

  • Emanuel Marcu & Charles N. Noussair, 2019. "Sequential Search with a Price Freeze Option: Theory and Experimental Evidence," Experimental Economics Center Working Paper Series 2019-03, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:exc:wpaper:2019-03
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    File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2019-03.pdf
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    More about this item

    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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