Associate Professor Liu Dongri from the School of Economics, Shandong University, and co-authors published their collaborative paper Buyer’s Hidden Search With Continuous Intensity: The Seller-Optimal Mechanism and a Perverse Effect, which appeared online in The RAND Journal of Economics, a premier international journal of industrial economics.
This research enriches the dynamic mechanism design theory integrating adverse selection and moral hazard, reveals brand-new economic mechanisms generated by continuously adjustable search intensity, and unifies the classic fixed search cost model as a special case of its analytical framework. Its conclusions revise the traditional view that raising buyers’ search costs benefits sellers, providing theoretical support for sales contract and pricing mechanism design in service and retail industries where consumers engage in multi-channel price comparison.
Adopting a dynamic mechanism design paradigm, this paper expands the binary search analytical framework proposed by Armstrong & Zhou (2016). It investigates the seller’s revenue-maximizing optimal sales mechanism under a scenario where buyers hold private valuations of goods and may independently choose continuous search intensity to obtain external alternative payoffs. The model incorporates both continuous adverse selection and moral hazard stemming from hidden search. It demonstrates that the optimal mechanism can be implemented via a menu of purchase options, categorizing buyers into three groups: those who purchase immediately, those who delay transactions while holding options, and those who abandon the product to search solely for external alternatives. The study draws a pivotal counterintuitive conclusion: in the binary search framework, lower search costs inevitably reduce seller revenue. However, under continuous search intensity settings, reduced search costs simultaneously generate a search-promotion effect and a search-suppression effect. When the suppression effect dominates, the seller’s expected revenue rises instead. Furthermore, restricting buyers’ available choices of search intensity erodes sellers’ profits.
Liu Dongri is the first author of this paper, and Professor Lü Jingfeng from the National University of Singapore serves as the corresponding author.
Liu Dongri, Associate Professor at the School of Economics, earned his PhD from the National University of Singapore. He has published multiple academic papers in economic journals including GEB, JME, IME, and Economics Letters, and presides over a Shandong Provincial Natural Science Foundation project.
