Unilateral and bilateral searching

Imagine you want to buy a new web camera. You go onto google, type ‘web camera’, you click the first link that takes you to website1 and you look at the price. Let’s assume you know exactly what you want, so you only check the price of the model that you want. You face a choice: buy now or keep searching. You choose to write down the price and return to the google result listing. You click on the second link that takes you to website2 and you repeat the process. You compare the lowest price of the two and again you have a choice: Buy the best price or keep searching.

In theory you could repeat the process ad infinitum, or until you exhaust the whole google/yahoo/msn etc. databases and you go through all the providers. Then you can continue the search by visiting the high street shops in your city and compare the prices in the same fashion. In the end you will find your best buy.

The main problem with the process above is that it is time consuming. That means costly. You can estimate the cost of your time spent on this by putting a value on it. For instance, if you earn X$ an hour, you can easily calculate in the end how much the search has cost you. At any point, you can calculate an average cost per new search by looking at how costly previous searches were. You might discover that the longer you search, the more expensive each search becomes as a lot of the information from the search engines contains a lot of false positives, the further you navigate away from the first page.

So, at any point, you can calculate the cost of you choice between buying now and the cost of searching and even a probability of finding a better price. You can calculate the point when you can stop the search in terms of the cost of searching and the cost of your time. As such, you can stop when the cost of the next search is greater than the cost of your time spent on the search. You also have to consider the probability that the new search will improve the best price you already discovered.

That’s an unilateral search and it’s characterized by a dynamic side, You, searching for the web camera, which web camera is the static side, which doesn’t change (You can always return to a previous result).

Bilateral searching is different from unilateral searching in that both sides are dynamic and searching.

Imagine you’re looking to buy a house. You can repeat the process described in the unilateral search, but as you keep searching, the other party keeps searching too. So in the end, it might not always be possible to return to your previous best buy. Your previous best buy might decide to sell the house to someone else who offers a better price, while you keep searching.

As such, the calculation of cost for bilateral searching is more complicated and it needs to take into consideration the risk of losing the best buy while you keep searching for price improvement. That means usually that you would stop sooner in a bilateral search than in a unilateral search. Alternatively, you might not lose best buys or take much longer to trade as you lose some opportunities and you have to restart your search.

This risk of losing the current offer also forces us to settle for good buys rather than best buys.

On the house market, this is evident as buyers are quick to put offers in a sellers’ market than in a buyers’ market. In a buyers’ market, they take more time to search, as they know the risk of the ‘best buy’ going away is diminished.

The bilateral search applies to many searches in real life: house purchases, renting, buying unique goods (e.g. art, second hand cars, etc.), financial trading of securities, and many others. Interestingly, this applies in a more general context and it affects searching for a partner for example…

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