Competition in Search Markets with Naive Consumers

Tobias Gamp and Daniel Krähmer
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Tobias Gamp: HU Berlin
Daniel Krähmer: University of Bonn

No 364, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study the interplay between quality provision and consumer search in a search market where firms may design products of inferior quality to promote them to naive consumers who fail to fully understand product characteristics. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, the share of firms offering superior goods in the market goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.

Keywords: inferior products; competition; naivete; consumer search (search for similar items in EconPapers)
JEL-codes: D18 D21 D43 D83 (search for similar items in EconPapers)
Date: 2022-12-30
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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