Search Costs and Risky Investment in Quality

Arthur Fishman () and Nadav Levy
Additional contact information
Arthur Fishman: Bar-Ilan University

No 2011-04, Working Papers from Bar-Ilan University, Department of Economics

Abstract: One striking development associated with the explosion of e-commerce is the increased transparency of sellers' quality history. In this paper we analyze how this affects fi rms' incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer's cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a fi rm, despite its best efforts, may fail to live up to consumers' more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.

Keywords: search; internet search; quality; risky investment (search for similar items in EconPapers)
JEL-codes: D83 L15 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-com and nep-ict
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www2.biu.ac.il/soc/ec/wp/2011-04.pdf Working paper (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www2.biu.ac.il:443 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:biu:wpaper:2011-04

Access Statistics for this paper

More papers in Working Papers from Bar-Ilan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Department of Economics ().