Product Quality and Consumer Search

Abstract

An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The number of products that consumers inspect does not necessarily increase in quality. Higher search costs may lead to less quality investment, and the equilibrium price may decrease. If the equilibrium is inefficient, it is because of the inadequacy of quality investment. 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 rise in quality results in consumers inspecting a higher (lower) number of products. (JEL D11, D21, D83, G31, L15)

Search and Competition Under Product Quality Uncertainty*

“…3 3 This is consistent with the results in the existing literature, where a decrease in search cost boosts consumer surplus and welfare even when it leads to higher market price (e.g., Chen and Zhang, 2011;Bar-Isaac et al, 2012;Zhou, 2014;Moraga-González, et al, 2017;Choi, et al, 2018) or to lowers product quality (e.g., Fishman and Levy, 2015;Moraga-González and Sun, 2022).…”

“…32 Notable exceptions: When a seller can manipulate the browsing cost of potential buyers, Taylor [2017] shows that a higher browsing cost can benefit consumers by driving away less-serious buyers while increasing the sales effort of the seller; while with endogenous market structure, Rhodes and Zhou [2019] find that lower search frictions can lead to a segmented market structure with higher prices and lower consumer welfare. 33 This is consistent with the results in the existing literature, where a decrease in search cost boosts consumer surplus and welfare even when it leads to higher market price (e.g., Chen and Zhang [2011]; Bar-Isaac et al [2012]; Zhou [2014]; Moraga-González et al [2017]; Choi et al [2018]) or to lower product quality (e.g., Fishman and Levy [2015]; Moraga-González and Sun [2023]).…”

“…Suppose that in equilibrium 𝜃 = 𝜃 𝜄 for 29 A similar hold-up problem also arises in Rhodes [2015]'s model of multiproduct retailing, where the problem is alleviated when a firm offers a large product range or advertises a low price on one product. 30 This is related to other studies of consumer search with investment in product quality (e.g., Fishman and Levy [2015]; Moraga-González and Sun [2023]). Relatedly, Wolinsky [2005] and Moraga-González and Sun [2019] study consumer search models in which sellers exert costly efforts to create service plans.…”