Optimal Search and Discovery

TL;DR

This paper characterizes the optimal search strategy for consumers discovering products, showing it can be summarized by reservation values and an index, with notable differences from classical search models.

Contribution

It introduces a tractable framework for optimal search and discovery, deriving reservation values and an index that fully determine consumer behavior.

Findings

Optimal policy characterized by reservation values

A predetermined index guides purchase decisions

Differences from classical search models highlighted

Abstract

This paper studies a search problem where a consumer is initially aware of only a few products. At every point in time, the consumer then decides between searching among alternatives he is already aware of and discovering more products. I show that the optimal policy for this search and discovery problem is fully characterized by tractable reservation values. Moreover, I prove that a predetermined index fully specifies the purchase decision of a consumer following the optimal search policy. Finally, a comparison highlights differences to classical random and directed search.