Buyer's choice of online search strategy and its implications for e-markets

This research empirically investigates the validity of economics theory of information search in explaining buyers' choice of online search strategy and applies this theory to develop a mathematical model that is used to estimate the probability distribution of a buyer's online search strategy choice. The study illustrates how an online seller can combine this knowledge about the probability distribution of buyers' choice of online search strategy with the distribution of market share among all the online sellers (information readily available to sellers) to estimate the dominant online search strategy of buyers and subsequently its expected probability of making a sale. Each online seller can use its probability of making a sale to identify its optimal online pricing strategy, and estimate its performance in e-markets. The significant findings from this research are---(a) Economics theory of information search can be used to explain a buyer's choice of online search strategy. This finding is significant because this theory has found very weak support in explaining buyers' offline search behavior. (b) The probability distribution of a buyer's choice of online search strategy is mainly affected by his perceived distribution of online prices, and not by the type of distribution of buyers' search cost and search intensity. (c) Perceived distribution of online prices, perceived price ranking of preferred/favorite seller, and the proportion of online buyers aware of online search tools have a significant impact on the estimated distribution of a buyer's choice of online search strategy. (d) Online price dispersion will always exist in online markets even if the cost structure of online sellers is same and the buyers have low search costs. (e) Online sellers with relatively high market share are more likely to have higher online prices when the likelihood of buying directly from one's preferred seller dominates the other online search strategies.