Buyer's Hidden Search With Continuous Intensity: The Seller‐Optimal Mechanism and a Perverse Effect

ABSTRACT

We adopt a dynamic mechanism design approach to study how a revenue‐maximizing seller should sell an indivisible object when a buyer with a private value can search for an outside option with continuous‐intensity choices. We find that lowering the buyer's search cost definitely reduces the seller's revenue when the buyer's search decision is binary, as in Armstrong and Zhou (2016). In contrast, with continuous search intensity, a counterintuitive effect may arise: lowering the buyer's search cost function can, under mild conditions, actually increase the seller's revenue.