Nested search

TL;DR

This paper introduces a nested search problem modeled as a tree, incorporating incremental search and prize correlation, deriving an optimal index policy, and applying it to market competition with regulatory implications.

Contribution

It generalizes Weitzman's search model to include incremental search and correlated prizes, providing a new optimal policy solution and a market application.

Findings

Optimal index policy derived for the nested search problem.

Regulations on drip pricing lower equilibrium prices.

Consumer surplus increases due to pricing regulations.

Abstract

I introduce and study a nested search problem modeled as a tree structure that generalizes Weitzman (1979) in two ways: (1) search progresses incrementally, reflecting real-life scenarios where agents gradually acquire information about the prizes; and (2) the realization of prizes can be correlated, capturing similarities among them. I derive the optimal policy, which takes the form of an index solution. I apply this result to study monopolistic competition in a market with two stages of product inspection. My application illustrates that regulations on drip pricing lower equilibrium price and raise consumer surplus.