Consumer search with observational learning

Authors: Sandro Shelegia

RAND Journal of Economics, Vol. 49, No 1, 224-253, March, 2018

This article studies observational learning in a consumer search environment. Consumers observe the purchasing decision of a predecessor with similar preferences. Consumers rationally emulate by initiating their search at the firm from which their predecessor purchased, free-riding on search effort, and reacting less to price changes. Prices are nonmonotone in search costs and may be as low as marginal costs. We discuss several extensions and show that the effect of emulation on prices is stronger when (i) the number of firms increases, (ii) consumers' first visits are more elastic with respect to market shares, and (iii) prices are adjusted more frequently.