What is a Search Cost?
A search cost is a cost that is 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 get 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 confronted with an assortment of products in the body care aisle. The consumer has a number of shampoos available for ready comparison, allowing the consumer to easily look at differences in quality, ingredients, and price. The search cost for shampoo is low, because all of the information is in a convenient location. Since no extra costs need to be spent in comparing products, the consumer tends to gravitate towards less expensive products in the product class the consumer is interested in, such as scent-free shampoos or anti-dandruff shampoos.
By contrast, when someone goes to a farmers' market for produce, the produce is scattered across a wide area and there may be concerns that a particular stall will sell out. This raises the search cost because the consumer needs to spend more time looking for products. Likewise, if a consumer has to drive to different locations to compare product prices, this also elevates the search cost.
When consumers make buying decisions, search cost can play a key role. As an associated transaction cost, it can drive the overall price of a product up or down. It can also become what is known as a switching barrier, meaning that it presents an obstacle to switching products or suppliers. If it is a hassle to get pricing information about cell phone plans, for example, a consumer may stick with an existing plan rather than incurring search costs for a different plan. Companies can take advantage of this by advertising their rates to reduce search costs for consumers and provide an incentive to switch.
The Internet has developed into a great leveler when it comes to search costs. Consumers can easily look up products on the Internet to get information about them, with some websites even providing product comparison tools which allow people to select a group of products to examine side by side. When search costs are low, product costs tend to be similar from different merchants, because merchants know that consumers will flock to the person who offers the lowest pricing.
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