Efrusan: Maine Voices: The economics of search – the special case of buying a mattress

Consumers navigate “search markets” when making major purchases, such as buying a house, a car, a TV or a new mattress. Many consumers are unable to delegate the search tasks to someone else and therefore must themselves take on the tasks of searching for information, deciding what they want and negotiating and completing the transaction. The “tyranny of choice” in today’s world means that consumers have to temporarily become an expert in order to make a reasonably well-informed choice.

Buying a new mattress has been harder for me than buying a new home and car. Mattresses seem trickier both because of the subjectivity involved in making the choice and the need to consider both local and online buying options. A consumer can to a certain extent “test drive” locally available alternatives, but it’s a bit harder to make an informed decision when some of the highest-rated products are available only online. The key may be to spend enough time and resources in the search to avoid buyer’s remorse.

The basic problem that consumers face when making major purchases is that of “asymmetric information.” Manufacturers and retailers typically sell products continually and therefore are likely to be well informed about their products and competitors. This may place consumers at a disadvantage.

Two important types of asymmetric information have to do with hidden knowledge (adverse selection) and hidden action (moral hazard). For example, the seller may have more or different information than the buyer (e.g., on product quality), and they may not have incentives to share their information. “Hidden action” refers to the existence of hidden or unverifiable actions in a contractual relationship (e.g., it could relate to a seller providing misleading information to buyers).

Consumers must strive to get up to speed each time they make a major purchase. A reasonable rule for consumers may be to seek to maximize satisfaction by spending enough time searching for a product up front to avoid the costs of regretting their decision (e.g., by avoiding buying a “lemon”). The goal would be to search only up to the point where the opportunity cost of the time spent by a consumer equals the benefit from the additional search. For me, the risk of incurring substantial “remorse costs” seems particularly high in the case of buying a new mattress.

Three economists – George Akerlof, Michael Spence and Joseph Stiglitz – shared the 2001 Nobel Prize in Economics for their contributions to the economics of information.

Akerlof’s research suggests that adverse selection can result in low-quality and low-cost products squeezing out high-quality and high-cost products, with consumers then assuming the worst. Simply put: If buyers can’t tell a “cherry” from a “lemon,” they may want to pay no more than the price of a lemon.

Spence investigated how businesses can find ways to “signal” their private information to consumers to help consumers make informed decisions.

Stiglitz studied how companies can use “screening” to learn about consumer preferences (e.g., by offering a “menu” of products).

The work of these economic experts suggests that businesses may have incentives to seek to mitigate consumers’ asymmetric information problem. For example, carmakers often locate near each other so that consumers can become better informed by shopping around, and many mattress retailers offer multiple products from various makers in order to help consumers comparison shop. Online mattress makers can compete by offering strong warranties and generous return policies to overcome consumers’ limited opportunity to “test drive” their products.

Consumers can seek to solve their own asymmetric information problems by becoming better informed, perhaps by investigating Consumer Reports, Wirecutter and other sources of information. Consumers may be able to find ways to reduce search and information costs by sharing information with others, i.e., “word of mouth.” Consumers can read online reviews posted by recent mattress buyers to help them navigate the buying process.

Individual consumers cannot solve all of the asymmetric information problems themselves, so there is a role for government to mitigate firms’ incentives to mislead consumers via “consumer protection” laws.

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