Sequential search: transaction costs management of an industrial enterprise

Search for information on the market situation and potential counterparty is one of the crucial tasks that an industrial enterprise faces. Information obtained at this stage ensures determination of further strategy of the company in negotiations with suppliers and customers and helps to lower the risk of administrative errors and opportunistic losses. An important distinction of between search by an industrial enterprise and information search by an individual is the importance of the name of the manufacturer. On the b2b market, an industrial enterprise will always look for direct contact with the product manufacturer, rather than the firm-intermediary, which is more convenient for individuals. Therefore, an industrial enterprise will search for information not only about product but also about the supplier of the goods. Reputation is an important property of the supplier. Search criterion "price of the product - reputation of the supplier" is introduced in the article. Using simulation modeling we conducted an experiment to find information about offers of suppliers of homogeneous goods with different price variation. We have compared the proposed criterion with the search for the lowest price. The results demonstrate that application of classical search criterion does not guarantee the success of the search. It also finds suppliers with poor reputation, negotiating and contracting with whom may lead to large losses due to violation of delivery terms or to delivery of goods with undesired quality for the industrial enterprise. In contrast, the search with the criterion "price of the product -reputation of the supplier" significantly increases the probability of successful search and provides greater reliability of the transaction. Search results for this criterion remain stable with the change of the number of suppliers. We have performed tests for different heterogeneity of costs (which corresponds to the use of different search channels). The transaction cost management of sequential search costs is corresponded with the step when the search should be stopped. After conducting the simulation experiment, we have obtained average values of the step when the search should be stopped. These values may be considered as a guideline for the industrial enterprise in matters of time spent on searching. Searching criterion that we have offered in this article can be combined with different rules for stopping the search, for example, ones that involves budget constraints for the size of search costs or the ones that take into account the size of the industrial enterprise. Another rule might be to limit searching time.

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