Experimental & Behavioural Economics Seminar - Professor Charles Noussair (University of Arizona)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Siqi Pan

siqi.pan@unimelb.edu.au

Title: Sequential Search with a Price Freeze Option: Theory and Experimental Evidence

Abstract: We study the economics of price freeze options (PFOs), by introducing them into a model of sequential search. The model makes a number of predictions, which we test in a laboratory experiment. The experiment varies (1) whether freezing is possible or not, (2) the cost of freezing, and (3) the length of the time horizon. Overall, we find that the observed treatment effects are consistent with the predictions of our model. Assuming that individuals experience regret, fail to ignore sunk search costs, misperceive the number of periods remaining, or are risk-averse, does not improve upon the performance of the model. Our results support the use of the assumption of optimal search behavior in theoretical and empirical studies.