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.