Smart Agents: When Lower Search Costs for Quality Information Increase Price Sensitivity

16 Pages Posted: 26 Oct 2002

See all articles by Kristin Diehl

Kristin Diehl

University of Southern California - Marshall School of Business

Laura J. Kornish

University of Colorado at Boulder - Leeds School of Business

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making

Abstract

Recent consumer research suggests that lowering search costs for quality information reduces consumer price sensitivity by creating greater perceived differentiation among brands (e.g., Kaul and Wittink 1995; Lynch and Ariely 2000). We argue that lowering quality search costs by smart agents can have the opposite effect on differentiation and price sensitivity. Smart agents screen through a universe of alternatives, recommending only a handful well-matched to the customer's quality preferences. In this research, we ask and answer the following questions: In markets in which price and quality are uncorrelated, will the use of screening agents increase or decrease prices paid compared to searching from an unordered list of options? Will increasing the size of the store's underlying assortment increase or decrease prices paid when options have been screened on quality? In markets where higher priced goods have higher quality, will the use of screening agents increase or decrease prices paid and quality selected? Experiments 1 and 2 test the effect of quality screening when price and quality are uncorrelated. We then present an analytic model for markets in which price and quality are correlated. We deduce that ordering can cause price and quality to increase or decrease depending on the slope of the price quality relationship in comparison with the relative importance of price in the utility function. We find support for this model in Experiment 3.

Suggested Citation

Diehl, Kristin and Kornish, Laura J. and Lynch, John G., Smart Agents: When Lower Search Costs for Quality Information Increase Price Sensitivity. Journal of Consumer Research, Vol. 30, June 2003. Available at SSRN: https://ssrn.com/abstract=340040 or http://dx.doi.org/10.2139/ssrn.340040

Kristin Diehl (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Laura J. Kornish

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

John G. Lynch

University of Colorado-Boulder, Leeds School of Business - Center for Research on Consumer Financial Decision Making ( email )

Leeds School of Business
Boulder, CO 80309-0419
United States
919-971-5201 (Phone)

HOME PAGE: http://https://www.colorado.edu/business/john-g-lynch-jr

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