Search costs are a facet of transaction costs or switching costs and include all the costs associated with the searching activity conducted by a prospective seller and buyer in a market. Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit. Search theory is a branch of microeconomics that studies decisions of this type.
The costs of searching are divided into external and internal costs.[1] External costs include the monetary costs of acquiring the information, and the opportunity cost of the time taken up in searching. External costs are not under the consumer's control, and all he or she can do is choose whether or not to incur them. Internal costs include the mental effort given over to undertaking the search, sorting the incoming information, and integrating it with what the consumer already knows. Internal costs are determined by the consumer's ability to undertake the search, and this in turn depends on intelligence, prior knowledge, education and training. These internal costs are the background to the study of bounded rationality.
There is an optimal value for search cost. A moderate amount of information maximises the likelihood of a purchase. Too much information to consumers may lead to negative effect. Too little information may not be enough to support consumers' purchasing decisions.[2]
Nonsequential search
When consumers commit to purchasing from the lowest-cost store retailer after acquiring a random sample of l (> 1) costs. [24] A per-price search cost customer selects the number of stores to solicit to minimize the total expected cost or the sum of the total search costs and the expected price for the product. [22]
Sequential search
Unlike nonsequential-search, sequential buyers opt to buy at the lowest price found thus far or do another search one after another. [24] There is a choice value tied to looking again at any price, and the optimum search problem is related to the "optimal stopping" issue. [22]
^Smith, Gerald E; Venkatraman, Meera P; Dholakia, Ruby Roy (June 1999). "Diagnosing the search cost effect: Waiting time and the moderating impact of prior category knowledge". Journal of Economic Psychology. 20 (3): 285–314. doi:10.1016/S0167-4870(99)00010-0.
^Branco, Fernando; Sun, Monic; Villas-Boas, J. Miguel (July 2016). "Too Much Information? Information Provision and Search Costs". Marketing Science. 35 (4): 605–618. doi:10.1287/mksc.2015.0959. ISSN 0732-2399.
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