The Impact of Consumer Search Cost on Assortment Planning and Pricing

Management Science, Forthcoming

49 Pages Posted: 2 Oct 2014 Last revised: 28 Jan 2017

See all articles by Ruxian Wang

Ruxian Wang

Johns Hopkins University - Carey Business School

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: September 28, 2014

Abstract

Consumers search for product information to resolve valuation uncertainties before purchase. We incorporate search cost into consumer choice models and study the two-stage consider-then-choose policy. In the first stage, a consumer forms her consideration set by balancing utility uncertainty and search cost; in the second stage, she evaluates all products in her consideration set and chooses the one with the highest net utility. We show that the revenue-ordered assortment (i.e., the offer set that includes products in the revenue-decreasing order) fails to be optimal, although it can obtain at least half the optimal revenue. We propose a k-quasi attractiveness-ordered assortment and show that it can be arbitrarily near-optimal for the market share maximization problem. The assortment problems with search cost are generally NP-hard, so we develop efficient approximation or relatively fast exact algorithms for a variety of assortment problems under the consider-then-choose models with search cost. For the joint assortment planning and pricing problem with homogeneous consumers, we show that the intrinsic-utility-ordered assortment and the quasi-same-price policy, which charges the same price for all products except at most one, are optimal.

Keywords: Revenue Management; Consumer Choice Model; Consideration Set; Search Cost; Marketing

Suggested Citation

Wang, Ruxian and Sahin, Ozge, The Impact of Consumer Search Cost on Assortment Planning and Pricing (September 28, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2503490 or http://dx.doi.org/10.2139/ssrn.2503490

Ruxian Wang (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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