Increasing consumer surplus through a novel product testing mechanism

Ulrike Vollstaedt, Patrick Imcke, Franziska Brendel and Christiane Ehses-Friedrich

No 887, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Our study proposes a novel mechanism to reduce information asymmetry about product quality between buyers and sellers. Product testing organizations like Consumer Reports (US) and Stiftung Warentest (Germany) seek to reduce this asymmetry by providing credible information. However, limited capacity leads to testing of only a select number of product models, often bestsellers, which can yield suboptimal information. After outlining our mechanism, we develop a game to derive testable predictions. We show theoretically that a unique Nash equilibrium exists in which our mechanism yields optimal information, equivalent to a world of complete information, while selecting bestsellers does not. Subsequently, we confirm experimentally that our mechanism increases consumer surplus.

Keywords: Consumer surplus; information asymmetry; product quality; product test; information disclosure; mechanism design; experiment (search for similar items in EconPapers)
JEL-codes: C72 C91 D82 L15 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-exp, nep-gth and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:887

DOI: 10.4419/96973026

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