We study a setting where a buyer chooses one of several available options whose values are initially unknown but can be discovered through costly search. Search is sequential, with perfect recall, which implies it is optimal for the buyer to search...
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ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
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We study a setting where a buyer chooses one of several available options whose values are initially unknown but can be discovered through costly search. Search is sequential, with perfect recall, which implies it is optimal for the buyer to search until the best option encountered so far exceeds a reservation value. In the baseline setting, the starting point of search is random. In a wicked default condition, the starting point of search is set optimally by a profit-maximizing firm to be the worst option above the reservation value, thereby preventing further search. This default extracts maximum surplus from the buyer when the seller's profits from and the buyer's valuations of the options are misaligned. The firm's profit increases in all cases, whereas welfare implications for buyers depend on the cost of search: low-cost buyers are better off, while high-cost buyers are worse off. Our experimental results are consistent with these predictions, even though the effect sizes are moderated due to sub-optimal search. Informing buyers that the default is selected in a profit-maximizing way does not change their aggregate behavior. Sellers thus continue to benefit from wicked defaults even when their motivations are revealed
