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Three Heuristics of Search for a Low Price in a Little-Known Market


Three Heuristics of Search for a Low Price in a Little-Known Market

Name and surname of author:

Michal Skořepa

Year:
2007
Issue:
4
Keywords:
search, heuristics, aspiration level, experiment, buyer behaviour
DOI (& full text):
Anotation:
One of the most rapidly growing fields within modern economics is so-called behavioural eco-nomics, which stems from an effort to enrich the methodological and conceptual apparatus of tra-ditional economics with approaches and concepts originating in psychology. This paper belongs to this research stream, but the focus of the paper specifically on the decision-making of buyers makes it relevant also for marketing.In traditional economics, buyer behaviour is usually modelled under the assumption of full infor-mation either on prices and their locations within the market or at least on the probability distribu-tion of prices in the market. Neither of these assumptions seems appropriate in some cases such as when the buyer enters the specific market only very infrequently (e.g., markets for durables, but in the opposite role also the labour market).This paper, using the method of an economic experiment, studies the search rules that buyers might use in this case of extreme lack of information on prices. The paper identifies three general search heuristics: Adaptation Heuristic (a priori idea of the highest acceptabe price changes in the light of actual price quotes observed during the search), Bargain Heuristic (idea of the highest acceptabe price is located at a certain distance below the estimated average price calculated from price quotes observed during the search) and Improvement Heuristic (idea of the highest accepta-be price is equla to the forecast of the price quote to be observed in the next search step, increa-sed by the cost of this step). On the bais of these three heuristics, the paper derives three specific search rules and, using data from a small-scale experiment, estimates parameters of the rules.
One of the most rapidly growing fields within modern economics is so-called behavioural eco-nomics, which stems from an effort to enrich the methodological and conceptual apparatus of tra-ditional economics with approaches and concepts originating in psychology. This paper belongs to this research stream, but the focus of the paper specifically on the decision-making of buyers makes it relevant also for marketing.In traditional economics, buyer behaviour is usually modelled under the assumption of full infor-mation either on prices and their locations within the market or at least on the probability distribu-tion of prices in the market. Neither of these assumptions seems appropriate in some cases such as when the buyer enters the specific market only very infrequently (e.g., markets for durables, but in the opposite role also the labour market).This paper, using the method of an economic experiment, studies the search rules that buyers might use in this case of extreme lack of information on prices. The paper identifies three general search heuristics: Adaptation Heuristic (a priori idea of the highest acceptabe price changes in the light of actual price quotes observed during the search), Bargain Heuristic (idea of the highest acceptabe price is located at a certain distance below the estimated average price calculated from price quotes observed during the search) and Improvement Heuristic (idea of the highest accepta-be price is equla to the forecast of the price quote to be observed in the next search step, increa-sed by the cost of this step). On the bais of these three heuristics, the paper derives three specific search rules and, using data from a small-scale experiment, estimates parameters of the rules.

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