Skip to main content
- Last updated
Save as PDF
- How should a consumer go about finding the lowest price when available prices are random?
- For many goods, prices vary across location and across time. In response to price variation, consumers will often search for low prices.
- In many circumstances the best strategy is a reservation price strategy, where the consumer buys whenever offered a price below the reservation price.
- Consumer search to minimize cost dictates setting a reservation price equal to the expected total cost of purchasing the good, and purchasing whenever the price offered is lower than that level.
- Suppose that there are two possible prices, one and two, and that the probability of the lower price one is x. Compute the consumer’s reservation price, which is the expected cost of searching, as a function of x and the cost of search c. For what values of x and c should the consumer accept two on the first search or continue searching until the lower price one is found?