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Dynamic Consumer Search

Author

Listed:
  • Parakhonyak, Alexei
  • Rhodes, Andrew

Abstract

We consider a model in which consumers wish to buy a product repeatedly over time, but need to engage in costly search to learn prices and find a product that matches them well. The optimal search rule has two reservation values, one for newly-searched products, and another for products that were searched in the past. Depending on the search cost, firms either keep price steady over time, or gradually raise price to take advantage of a growing pool of high-valuation repeat customers. The model generates rich search and purchase dynamics, as consumers may optimally “stagger” search over time, initially trying different products, settling on one and buying it for a while, before choosing to search again for something better. We also show that consumers may be better off when firms can offer personalized prices based on their search history.

Suggested Citation

  • Parakhonyak, Alexei & Rhodes, Andrew, 2024. "Dynamic Consumer Search," TSE Working Papers 24-1606, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:130101
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    References listed on IDEAS

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    1. Haan, Marco A. & Moraga-González, José L. & Petrikaitė, Vaiva, 2018. "A model of directed consumer search," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 223-255.
    2. Wilson, Chris M., 2012. "Market frictions: A unified model of search costs and switching costs," European Economic Review, Elsevier, vol. 56(6), pages 1070-1086.
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    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June.
    6. Fabra, Natalia & Reguant, Mar, 2020. "A model of search with price discrimination," European Economic Review, Elsevier, vol. 129(C).
    7. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
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    Cited by:

    1. Imahie, Satoshi, 2026. "Experience Premium in Consumer Search: Evidence from Drivers’ Refueling Behavior," TSE Working Papers 26-1757, Toulouse School of Economics (TSE).
    2. SatoshiImahie, 2026. "Experience Premium in Consumer Search: Evidence from Drivers’Refueling Behavior," Discussion Paper Series DP2026-22, Research Institute for Economics & Business Administration, Kobe University.

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    More about this item

    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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