Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

7.2 THE ECONOMICS OF SEARCH 
 
The unit begins by discussing search costs, sketching the 
process of searching for the lowest commodity price, and 
examining the informational content of advertising. 
 
7.2.1 Search Costs: 
A cost of purchasing a product is the time and money is spend on 
searching information about the product like 
What are the properties of the product? 
What are the substitutes? 
How good is the product? 
How safe? 
How much does the product cost in one store as compared to 
another? 
Thus Search costs include the time spent in reading 
advertising, telephoning, travelling, inspecting the product, and 
comparing shopping for the lowest price. Although the most 
important component of search costs is the time spent learning 
about characteristics of the product, consumers also spend money 
on purchasing information to assist them in their search. For 
instance, consumers might purchase Consumer Reports magazine 
to check on the quality of the product, pay an impartial mechanic to 
evaluate a used car before deciding on purchasing it, or seek 
professional help from a financial advisor before making a major 
investment in the financial product.
In most cases, however, the major cost of search is the time 
required to learn about the product. 
One of the most important and time-consuming aspects of 
purchasing a product is comparison shopping for the lowest price. 
Even when a product is standardized and conditions of sale are 
identical (i.e. locational convenience, politeness of service, 

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availability of credit, returns policy, etc), there will be price 
dispersion in the absence of perfect information on the part of 
buyers.
The general rule is that a consumer should continue the 
search for lower prices as long as the marginal benefit from 
continuing the search exceeds the marginal cost, and until the 
marginal benefit equals the marginal cost. The marginal benefit 
(MB) is equal to the degree by which a lower price is found as a 
result of each additional search times the number of units of the 
product purchased at the lower price. The marginal cost (MC) of 
continuing the search depends on the value that consumers place 
on their time and money spend. Since the value that consumers 
place on their time differs for different consumers, when each 
consumer behaves according to the MB = MC rule the product will 
be purchased at different prices by different consumers.
Specifically, those consumers giving up more money on 
searching for lower prices will stop the search before consumers 
who face lower opportunity costs for their time, and thus will 
purchase the product at a higher price. On the other hand, with the 
MC curve of search declines due to internet facilities, consumers 
search more now than a decade ago.