Abstract
AbstractWe study a search market where firms may design products of inferior quality to promote them to naive consumers who misjudge product characteristics. We derive an equilibrium in which superior and inferior quality co‐exist and show that as search frictions vanish, the share of superior goods goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer for superior quality. Policy interventions that reduce search frictions such as the standardization of product information may harm welfare. In contrast, educating naive consumers as well as a minimum quality standard can improve welfare.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have