optimal+search


 * __Optimal Search__**

Optimal search strategy dictates that a consumer will continue to look for a more favorable price when the price of a given good is above the reservation price and stop looking (and purchase the product) when the price charged is below the reservation price. The reservation price is the price at which the consumer is indifferent between buying the product and continuing to search for a lower price. It is determined by the customer to be the price he or she is willing to pay for a given good.

A consumer that is searching for a product with a reservation price in mind should also consider the cost of searching. If there is a cost associated with searching, a consumer should purchase the first product that he finds that is at or below his reservation price in order to avoid paying the cost of an additional search.


 * __References__**

Baye, Micheal R. __Managerial Economics and Business Strategy__. 2006, pp. 440-442


 * __Sample Test Questions__**

If Sam needs to buy a toaster and would like to pay $10 or less (his reservation price), what will Sam do if he is in a store that has a toaster for sale at a price of $11?

a. Buy the toaster b. Go to another store to find a cheaper toaster c. Speak to the store manager d. Eat only plain bread and untoasted bagels in the future

Sam will go to a different store to search for a cheaper toaster to buy. Sam will not purchase a toaster that is priced higher than his reservation price of $10.

A consumer is searching for a good deal on printer. The person believes that half of the stores in town will charge $50 for a printer and that the other half of the stores will charge $75 for a printer. If the person finds a printer for sale for a price of $75 at the first store he checks, is it worth it for him to continue searching if he has identified the cost of each individual search as 10?

a. Yes, he should keep searching because he might find a toaster for sale for $50 b. No, it's not worth his search costs. He should just buy this printer for $75 The correct answer is b. He should just buy the first printer he finds. If it is $75, this person is better off buying it because the expected payoff of searching is $2.50 and the search cost alone is $10. If this person were to search again and find another printer for sale for $75, he has now effectively purchased a printer for $85. To find this answer, we must calculate the expected value of searching for another toaster. We do this by adding the probabilities that a printer of either price will be found and multiplying this by the payoff that results. The probability of finding a printer for $75 is 50% and the probability of finding a printer for $50 is 50%. The payoff for finding a printer for $50 is $25 minus the $10 search cost, for a total payoff of $15. The payoff for finding (and subsequently buying) a printer for $75 is simply the lost search cost of $10, for a total payoff of -$10.

Ex = ½(15) + ½(-10) = 0.50(15) + 0.50(-10) = 7.5 + (-5) = $2.50