Three Essays On Rational Consumer Behavior PDF Download

This thesis investigates consumer search behavior in different contexts and its implications on certain market outcomes. It consists of three self-contained essays. Part one investigates if people search optimally and how price promotions (such as the provision of price discounts) influence search intensity and risk-taking behavior. We start with a typical sequential search task in a finite time horizon (with exogenously determined price dispersion) as the baseline treatment. In the two experimental treatments, exogenous discounts are introduced to the search process. The treatments differ in the amount of information on the discounts revealed to the subjects. Subjects' search behavior is roughly consistent with optimality for a risk-neutral agent, but significantly influenced by the introduction of discount vouchers. We find that subjects' search intensity is significantly reduced if they are in a shop that offers discounts, even when the monetary benefit induced by the discount has been taken into account. This suggests that people seem to gain extra non-monetary utility from buying a discounted product. Alternatively, subjects might overestimate the value of a discount. Following the findings in part one, we focus on price-framing effects of discounts on consumer search behavior in part two. In order to isolate the price-framing effect from all other possible influences, we adopt an extremely simple two-shop search model in which a consumer who sees the price for an item in a shop has to decide either to buy it or to incur a search cost to learn the ex-ante uncertain price in a second shop. The experiment is designed such that a rational buyer should make identical decisions in the base treatment (where prices are posted as net prices in both shops) and in the experimental treatments (where the price in one of the shops is framed as a gross price with a discount, holding the net-price constant). Using structural estimation of the observed risk preferences, we find that people tend to be more risk-averse and hence buy from the initial shop more often in the discount treatments, regardless of where the discount is offered. The seemingly trivial change to a discount-framing increases the complexity of the decision problem. Subjects reveal a tendency to stick with the comparatively less complex options more frequently as the complexity of the decision problem increases. However, this bias declines with experience, as subjects become more and more familiar with the framing. In part three, we study search behavior in a market experiment, where prices are determined endogenously by human players. More specifically, we examine the behavioral factors and the underlying mechanism which drive the widely observed asymmetric price adjustment to cost shocks (in a world with costly search behavior and information asymmetry). We show that price dispersion, as well as asymmetric price adjustment to cost shocks, arises in experimental markets, even though the standard theory predicts neither. We find that after controlling all the potential theoretical factors, the observed price dispersion can be explained by the presence of bounded rational play. Under price dispersion, asymmetric price adjustment arises naturally, as it is harder for buyers to learn that a negative cost shock has taken place. Learning is much quicker after a positive shock.