DP14669 Product Quality and Consumer Search

Author(s): José-Luis Moraga-González, Yajie Sun
Publication Date: April 2020
Keyword(s): efficiency, quality investment, sequential search, super- and sub-modular match value distributions
JEL(s): D43, D83, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14669

This paper carries out a positive and normative analysis of the provision of quality in a consumer search market for differentiated products. An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The typical number of products consumers inspect before settling, however, does not necessarily increase in quality. Higher search costs may lead to less investment in quality and, correspondingly, the equilibrium price may decrease in search costs. If the equilibrium is socially inefficient, it is only because of the inadequacy of quality investment. There is a one-to-one relationship between the intensity of search and the inefficiency of the market equilibrium. The market level of quality investment is excessive (insufficient) and consumers are too (little) picky from the point of view of welfare maximization if and only if a raise in quality results in that consumers inspect a higher (lower) number of products.