Conditioning Prices on Search Behaviour

We consider a market in which …rms can partially observe each consumer’s search behavior in the market. In our main model, a …rm knows whether a consumer is visiting it for the …rst time or whether she is returning after a previous visit. Firms have an incentive to o¤er a lower price on a …rst visit than a return visit, so that new consumers are o¤ered a “buy-now”discount. The ability to o¤er such discounts acts to raise all prices in the market. If …rms cannot commit to their buy-later price, in many cases …rms make “exploding”o¤ers, and consumers never return to a previously sampled …rm. Likewise, if …rms must charge the same price to all consumers, regardless of search history, we show that they sometimes have the incentive to make exploding o¤ers. We also consider other ways in which …rms could use information about search behaviour to determine their prices.