Search cost

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Search costs are one facet of transaction costs or switching costs. Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit. Search theory is a branch of microeconomics that studies decisions of this type.

The costs of searching are divided into external and internal costs (Smith et al. 1999). External costs include the monetary costs of acquiring the information, and the opportunity cost of the time taken up in searching. External costs are not under the consumer's control, and all he or she can do is choose whether or not to incur them. Internal costs include the mental effort given over to undertaking the search, sorting the incoming information, and integrating it with what the consumer already knows. Internal costs are determined by the consumer's ability to undertake the search, and this in turn depends on intelligence, prior knowledge, education and training. These internal costs are the background to the study of bounded rationality.

The Internet was expected to eliminate search costs (Pereira 2005). For example, electronic commerce was predicted to cause disintermediation as search costs become low enough for end-consumers to incur them directly instead of employing retailers to do this for them. This would in turn lead to lower prices and less variation between prices quoted by different sellers.

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  • Smith, Gerald E.; Venkatraman, Meera P.; Dholakia, Ruby Roy (1999). "Diagnosing the search cost effect: Waiting time and the moderating impact of prior category knowledge". Journal of Economic Psychology. 20: 285–314. doi:10.1016/s0167-4870(99)00010-0.
  • Pereira, Pedro (2005). "Do lower search costs reduce prices and price dispersion?". Information Economics and Policy. 17: 61–72. doi:10.1016/j.infoecopol.2004.03.001.