Sequential Search with a Price Freeze Option - Theory and Experimental Evidence

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. We consider both settings in which prior offers cannot be recalled, and those in which recall is imperfect. We find that the observed treatment effects are consistent with the predictions of our model, though on average searches are terminated earlier than predicted. Interestingly, the extent of undersearching is magnified by the presence of an affordable PFO.