Optimal Search for the Best Alternative

Weitzman, Martin L.

doi:10.2307/1910412

Cited by 959 publications

(633 citation statements)

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“…Also, from (7), note thatŪ(x, τ ) is increasing in x and decreasing in τ . Weitzman (1979) shows that this threshold search strategy is the optimal sequential search strategy.…”

Section: Competition With Sequential Searchmentioning

confidence: 89%

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

2008

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This paper studies a model in which consumers search among multiple competing firms for products that match their preferences at a reasonable price. We focus on how easier search, possibly due to the adoption of search-facilitating technologies such as the Internet, influences equilibrium prices, assortments, firm profits, and consumer welfare. Conventional wisdom suggests that easier search creates a competition-intensifying effect that puts pressure on firms to lower their prices and reduce assortments. However, in our model we demonstrate that search also exhibits a market-expansion effect that encourages firms to expand their assortment-easier search means that each firm is searched by more consumers. Because of broader assortments, consumers are more likely to find products that better match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market-expansion effect can even dominate the competition-intensifying effect potentially leading to higher prices, broader assortments, more profits, and expanded welfare. KeywordsInternet, price competition, assortment, product variety, long-tail phenomenon, game theory, differentiated competition Disciplines Marketing | Other Computer Sciences | Other Education AbstractIf searching for a better price becomes easier for consumers, conventional wisdom suggests that pricing pressure will increase on firms, thereby lowering prices, reducing firm profits and narrowing assortments. There is indeed evidence that recent search facilitating technologies, such as the Internet, have in some markets reduced prices. But there is also evidence that firms have been able to maintain some pricing power. Furthermore, there is evidence that the Internet has expanded variety in some markets and this broadening of the available assortment has increased consumer welfare significantly. This paper studies a model in which firms compete on price and assortment and consumers search for products that match their preferences at a reasonable price. Easier search does exhibit a competition intensifying effect in our model, and this effect puts pressure on firms to lower their prices and reduce assortments. But we also show that easier search exhibits a market expansion effect that encourages firms to expand their assortment. Due to broader assortments, consumers are more likely to find products that match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices, broader assortments, more profits and expanded welfare.

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“…Also, from (7), note thatŪ(x, τ ) is increasing in x and decreasing in τ . Weitzman (1979) shows that this threshold search strategy is the optimal sequential search strategy.…”

Section: Competition With Sequential Searchmentioning

confidence: 89%

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

2008

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“…Hence this phase can be characterized as a pay-as-you-go exploration with a possibility of terminating the specific measure if it turns out to be unfavourable. The pay-as-you-go property makes the problem difficult to solve for several measures even without introducing gradual information revelation of cost and effect and the possibility of parallel implementation of several measures 3 , see for example Weitzman [4], Gittins and Jones [5], Banks and Sundaram [7] and Sundaram [8] for contributions on search economics. Weitzman [4] separates the learning phase from the implementation phase, while the others study the optimal acquisition of information by economic agents under different cost assumptions.…”

Section: Is E(g)=npv C (∞)-E(npv U|c (T R ∞)) Which Can Be Stated Asmentioning

confidence: 99%

“…The pay-as-you-go property makes the problem difficult to solve for several measures even without introducing gradual information revelation of cost and effect and the possibility of parallel implementation of several measures 3 , see for example Weitzman [4], Gittins and Jones [5], Banks and Sundaram [7] and Sundaram [8] for contributions on search economics. Weitzman [4] separates the learning phase from the implementation phase, while the others study the optimal acquisition of information by economic agents under different cost assumptions. Indeed, these contributions demonstrate that in order to obtain analytical decision rules, the assumptions must be "simple" with respect to cost structures and/or information revelation.…”

Section: Is E(g)=npv C (∞)-E(npv U|c (T R ∞)) Which Can Be Stated Asmentioning

confidence: 99%

The Prioritization of Risk Reducing Measures in View of Uncertain Cost/Benefits

Bjørkvoll

Langseth

2004

Probabilistic Safety Assessment and Management

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“…Weitzman (1979) presents a model that provides an optimal search policy among several alternatives of sequential enterprises. The model can be applied, for instance, in technology development projects where alternative approaches, distinct with regard not only to costs but also to payoff, are sequentially tested.…”

Section: Introductionmentioning

confidence: 99%

New product development projects evaluation under time uncertainty

Silva

Santiago

2009

Pesqui. Oper.

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The development time is one of the key factors that contribute to the new product development success. In spite of that, the impact of the time uncertainty on the development has been not fully exploited, as far as decision supporting models to evaluate this kind of projects is concerned. In this context, the objective of the present paper is to evaluate the development process of new technologies under time uncertainty. We introduce a model which captures this source of uncertainty and develop an algorithm to evaluate projects that incorporates Monte Carlo Simulation and Dynamic Programming. The novelty in our approach is to thoroughly blend the stochastic time with a formal approach to the problem, which preserves the Markov property. We base our model on the distinction between the decision epoch and the stochastic time. We discuss and illustrate the applicability of our model through an empirical example.Keywords: decision under uncertainty; dynamic programming; Monte Carlo simulation; project management; R&D projects. ResumoO tempo de desenvolvimento é um dos fatores-chave que contribuem para o sucesso do desenvolvimento de novos produtos. Apesar disso, o impacto da incerteza de tempo no desenvolvimento tem sido pouco considerado em modelos de avaliação e valoração deste tipo de projetos. Neste contexto, este trabalho tem como objetivo avaliar projetos de desenvolvimento de novas tecnologias mediante o tempo incerto. Introduzimos um modelo capaz de captar esta fonte de incerteza e desenvolvemos um algoritmo para a valoração do projeto que integra Simulação de Monte Carlo e Programação Dinâmica. A novidade neste trabalho é conseguir integrar meticulosamente o tempo estocástico a uma estrutura formal para tomada de decisão que preserva a propriedade de Markov. O principal ponto para viabilizar este fato é distinção entre o momento de revisão e o tempo estocástico. Ilustramos e discutimos a aplicabilidade deste modelo por meio de um exemplo empírico.Palavras-chave: decisão sob incerteza; programação dinâmica; simulação de Monte Carlo; gerenciamento de projetos; projetos de P&D.

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Optimal Search for the Best Alternative

Cited by 959 publications

References 9 publications

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

The Prioritization of Risk Reducing Measures in View of Uncertain Cost/Benefits

New product development projects evaluation under time uncertainty

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