The Difference of Optimal Search Set and Effect of Recommendation on Online Shopping – comparing a search goods and an experience goods

Abstract

Consumers mostly are not aware of all products due to limited recognition capacity. In addition, they search for a limited number of products because of search cost. Search cost can be divided into external cost and internal cost, which includes not only the cost directly related to the search action, but also the cost related to information processing and evaluating products. This research added additional assumptions to the consumer search model of Kim et al. (2010). Simultaneously considering the limited awareness set and limited search, I estimated each search cost of both coffee makers and whole coffee beans. Consistent with the assertion of Huang et al. (2009), that consumers spend more time to evaluate experience goods, whole coffee beans, which are close to experience goods, have a remarkably higher search cost than that of coffee makers, which are close to search goods. Conducting a simulation study and counterfactual experiment with estimated parameters, experience goods have a smaller optimal search set size. In addition, consumers are more likely to change their choice or buy products when products recommendation or references are given in the case of experience goods. Therefore, I concluded that accurate product recommendations that suggest a high-utility product to consumers are more important for experience goods.