Are Consumers Fooled by Discounts? An Experimental Test in a Consumer Search Environment

In this paper we investigate experimentally if people search optimally and how price promotions in‡uence search behavior. We implement a sequential search task with exogenous price dispersion in a baseline treatment and introduce discounts in two experimental treatments. We …nd that search behavior is roughly consistent with optimal search but also observe some discount biases. If subjects don’t know in advance where discounts are o¤ered the purchase probability is increased by 19 percentage points in shops with discounts, even after controlling for the bene…t of the discount and for risk preferences. If consumers know in advance where discounts are given then the bias is only weakly signi…cant and much smaller (7 percentage points). Keywords: Consumer Search Theory, Search Cost, Price Promotion JEL codes: D82, D83, C91 Acknowledgements We want to thank the Faculty of Professions at the University of Adelaide for their generous …nancial support. Mickey Chan’s able research assistance is gratefully acknowledged. School of Economics, University of Adelaide, SA 5005, Australia. yMax Planck Institute for Intellectual Property, Competition and Tax Law, Department of Public Economics, Marstallplatz 1, 80539 Munich, email: [email protected] (corresponding author) .