It's Good to be Bad. A Model of Low Quality Dominance in a Full Information Consumer Search Market

Stuart Baumann and Margaryta Klymak
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Margaryta Klymak: http://www.klymak.com/

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique re ned equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless.

Keywords: Consumer Search; Quality Disclosure (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 (search for similar items in EconPapers)
Pages: 43
Date: 2017-06
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:280

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