Sources of consumer information

Frederic Koessler and Régis Renault ()
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Régis Renault: THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université

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Abstract: A buyer can learn about a product, either through search or through the information disclosed by the seller. We analyze how this buyer-seller relationship is affected by lower search costs or an improvement in the seller's ability to fine-tune her disclosure of product information. Whereas a drop in search costs improves consumer surplus and decreases profit when the seller can resort to an optimal disclosure strategy, its impact is ambiguous if the seller is unable to provide information. When it is unlikely that the buyer's valuation is below marginal cost, the buyer does not benefit from optimal information disclosure by the seller if search costs are high. With such high search costs and no disclosure both parties can be better off than with lower search costs and optimal information disclosure. The seller then adopts a mass market strategy where she posts a low enough price so the buyer always purchases the product without search. By contrast, if it is sufficiently likely that the buyer's valuation is below marginal cost, then the buyer can benefit from sophisticated information disclosure for relatively low search costs. The corresponding outcome is better for both parties than an environment with higher search costs and no information disclosure. The optimal seller strategy targets a niche of high-valuation buyers and prevents wasteful search by buyers with low valuations.

Keywords: information disclosure; information acquisition; advertising; search (search for similar items in EconPapers)
Date: 2023-03-01
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