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Search cost is the cost of acquiring information about a product, including time and energy spent searching. It affects consumer decision making and can be a switching barrier. The internet has lowered search costs and increased price competition.
A search cost is a cost associated with acquiring information about a product. This can be a literal cost in the sense of money that must be paid to find information, but it can also be a cost such as time or energy spent searching. The lower the search cost, the easier it is for a consumer to obtain product information. This plays a role in consumer decision making.
In a simple example of how search cost works, when people go to the supermarket to buy shampoo, they are faced with a variety of products in the body care aisle. A number of shampoos are available to the consumer for quick comparison, allowing them to easily see the differences in quality, ingredients, and price. The search cost of the shampoo is low, because all the information is in one convenient location. Since there is no need to spend additional costs on product comparison, the consumer tends to gravitate towards less expensive products in the product class they are interested in, such as fragrance-free shampoos or anti-dandruff shampoos.
Conversely, when someone goes to a farmers market to get produce, the produce is scattered over a wide area, and there may be concerns that a particular stall will sell out. This increases the search cost because the consumer needs to spend more time searching for products. Similarly, if a consumer has to drive to different locations to compare product prices, this also raises the search cost.
When consumers make purchasing decisions, search cost can play a key role. As an associated transaction cost, it can increase or decrease the overall price of a product. It can also become what is known as a switching barrier, meaning that it presents an obstacle to switching products or providers. If it’s a hassle to get information on cell phone plan prices, for example, a consumer can stick with an existing plan rather than incur costs to search for a different plan. Businesses can take advantage of this by announcing their rates to reduce search costs for consumers and provide an incentive to switch.
The Internet has become a great equalizer when it comes to search costs. Consumers can easily search for products on the Internet to learn about them, and some websites even offer product comparison tools that allow people to select a group of products to examine side by side. When search costs are low, product costs tend to be similar for different merchants, because merchants know that consumers will go to the person who offers the lowest price.
Smart Asset.
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