Brand Name as a Barrier to Entry: The Rea Lemon Case

Abstract

This paper is concerned with the relationships among consumer demand for and seller supply of product information and market equilibrium: with the effect of brand name on competition, the level of prices, and the extent of product variety on one hand, and with the implications of these results for allocative efficiency and antitrust policy on the other. Since the pioneering studies of information economics by Scitovsky [13] and Stigler [14] it has been recognized that firms supply only a limited amount of product information and consumers search out only a subset of the available brands of a given commodity. This result of non-negligible, increasing information costs means that consumers have only partial knowledge of market prices and brand characteristics. The residual ignorance in turn implies that prices need not adjust at the margin to equalize actual differences (or nondifferences) in brand quality. The literature has thus come to the understanding that, when product information is costly, some form of monopoly is the proper model of markets and not competition. While these things have been known for some time, it is not commonly understood that the inelasticity of demand that results in this case, along with the restriction of output and the associated rise in price, does not adversely affect the allocation of resources in any remediable way. When buyers make their consumption decision on the basis of the best available information, the payment of a price in excess of that in a corresponding market with costless information can be regarded as a choice error and a market failure only if it is further presumed either that buyers should have known better or that there is an alternative organization of the industry and exchange to allow information to be provided at lower cost.