Search cost

The most basic search cost model serves as a foundation for subsequent models. Peter A. Diamond's Model of Price Adjustment illustrates that small search frictions have an important role in market structure,[4] and a firm's capacity to deviate from Bertrand Competition.[5]

Proposition of the model:

A unique nash equilibrium is: ${\displaystyle p_{1}^{*}=p_{2}^{*}=...=p_{n}^{*}=p^{m}}$,[5] where, s = Cost of obtaining price at quote with ${\displaystyle 0<s<CS(p^{m})}$,[5] CS = Consumer surplus and p = Price.

The model implies that search frictions can result in the perfectly competitive market price shifting to the monopoly price.[5] However, Diamond's original model is rudimentary and ignores some empirical observations:[4]

1. Agents in an economy only search once, whereas there is a continuous search for goods and services.[4]
2. Few consumers search in equilibrium, which is inconsistent with empirical observation.[4]
3. The model uses an alternative to the “law of one price”. The monopoly price is used as opposed to marginal cost, with no consideration for price dispersion in an equilibrium.[4]

Using Diamond's model as a base, a distinction is now made in the heterogenous search model. There are potential consumer heterogeneities for search costs being consistent with market observations (search costs can be 0 and negative).[5] In 1989, Ingemar Stahl expanded on Diamond's model; the model has the same assumptions as Diamond's model with the additions of ‘shoppers’ (μ) having a range of search costs (${\displaystyle -ve:+ve}$).[5]

Stahl's model addresses the three issues present in Diamond's basic price search model. Firstly, this model assumes that search costs are changing as ‘shoppers’ search costs change.[5] Secondly, all searches are now assumed to be done in equilibrium with different qualities of searches being conducted by different consumers (refers to the changing fraction of ‘shopper’ and their changing search costs, as consumers search at different times).[5] Finally, the model achieves price dispersion, which is consistent with empirical market observations.[5]

Signal-jamming model

The signal-jamming paradigm is another way that obfuscation might affect consumer search. Even though search costs are linear, allowing the exogenous component of customer search costs to be unknown makes obfuscation individually viable for enterprises. The underlying premise of this signal-jamming method is simple: if the time cost of the search is originally unknown, customers know about pricing from their initial purchasing encounters, therefore obfuscation boosts consumer expectations about future search costs. This method appears to be viable for a wide range of applications. ^[23]

For instance, it appears probable that customers may anticipate that receiving a second quote will take up a comparable amount of time if a home enhancement contractor spends quite some time preparing and submitting their bid and takes an extensive amount of time with the customer addressing the job's specifics. Whilst obfuscation is uniquely logical in this model, the mechanics of this model vary, which affects the outcomes in various ways. Among these is an issue with excessive obfuscation that makes both lesser. ^[23]

During the early and late 1970s, The Organisation of Arab Petroleum Exporting Countries, or OAPEC, stopped all its exports to the US, South Africa, Portugal, and the Netherlands due to their support of Israel in the Yom Kippur War.[6][7][8][9][10] Before the sanctions were imposed, the United States was receiving on average two thirds of its oil from OAPEC countries.[7] This caused a big shortage of fuel.[6][7][8][9][10] Motorists and business owners started having to spend more and more time looking for service stations with fuel in stock. Once a station was found motorists then had to wait in queues, sometimes as long as five miles, in order to fill up.[6][7][9] In some areas odd-even rationing was even instated. This meant that on odd numbered days only vehicles with odd numbers as the last digit on their number plate would be allowed to buy fuel and vice versa for even numbers.[6][7][9][10] Activities such as searching for fuel (the product) over time is called intertemporal search behaviour and is often associated with cross-sectional search behaviour.[11] Motorists comparing fuel prices at different service stations at a given point in time is an example of cross-sectional search behaviour.[11][12] These search behaviours result in a search cost to the consumer through the disutility gained in lost time.[12] During stages of fuel shortages, such as those mentioned above, there is an overall increase in these search behaviours and thus an increase in search costs.[11] Increasing search costs decreases the price elasticity of demand and thus suppliers increase prices.[11][12]

Job seeking activities such as finding vacant positions, gathering information about a firm, preparing a résumé and cover letter, preparing for an interview, and travelling to and from the job interview are examples of activities that incur a search cost from the individual.[13][14] The larger this search cost is the more likely the chance that a worker will exit the market before initiating a search for a job.[13][14] This is brought about by a combination of the low probability of finding a permanent job, as low as 19% in some studies/areas, and a low level of current capital.[14] These factors also often cause agents to cease their searching activities after a number of failed attempts, even when the worker has cash on hand that covers the search costs multiple times.[13][14] To maintain saving in excess of this minimum threshold value, the worker participates in temporary employment while conducting their search.[14] This increases the staff turnover of the these companies.[14] With increased technological integration of the advertisement and management of job opportunities as well as worker information and the provision of accessible and affordable public transport these effects can be treated.[13][14]