BUDGET-CONSTRAINED SEARCH

A consumer with diminishing marginal utility in consumption, who can s earch for lower prices, will balance the gains from spreading consumpt ion evenly through time against the benefits of delaying consumption u ntil lower prices are revealed. Optimal programs of consumption, savin gs and price are characterized for a general formulation of this probl em. Intertemporal substitutability is measured by relative-risk aversi on. That relative-risk aversion is small is sufficient for the intuiti ve solution: As the best current price rises, more search and less con sumption is done. The general model is adapted to special cases. Among other things, this shows that linear utility and sequential search im plies ex nte calculable reservation prices and consumption only when s earch stops. However, this characterization is a consequence of the re striction to linear utility. Outside of this context reservation price s and consumption may not be calculable, ex ante. (C) 1997 Elsevier Sc ience B.V.