For questions, please contact Shayne Trotman - firstname.lastname@example.org
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 find that the observed treatment effects are consistent with the predictions of our model, though on average there is some tendency for searches to be terminated earlier than predicted. The extent of under-searching relative to optimal risk-neutral behavior is magnified by the presence of an affordable PFO. Assuming that individuals experience regret, fail to ignore sunk search costs, or misperceive the number of periods remaining, does not improve upon the performance of the model. The data are consistent with a modest amount of risk aversion.