Consumer Information, Equilibrium Industry Price, and the Number of Sellers

Mark A. Satterthwaite

Bell Journal of Economics, 1979, vol. 10, issue 2, 483-502

Abstract: Define a reputation good to be any product or service for which sellers' products are differentiated and consumers' search among sellers consists of a series of inquiries to relatives, friends, and associates for recommendations. Examples of reputation goods are personal legal services and primary medical care. The paper shows that if a monopolistically competitive industry sells a reputation good, then an increased number of sellers may perversely cause the industry's equilibrium price to rise. This result is based on maximizing behavior on both sides of the market: consumers are assumed to search rationally and sellers are assumed to profit maximize.

Date: 1979
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