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Quality Uncertainty with Imperfect Information Acquisition

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  • Christopher Gertz

    (Center for Mathematical Economics, Bielefeld University)

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    Abstract

    We analyze a monopolistic model of quality uncertainty but with the possibility of information acquisition on the consumer side. Information is costly and its amount is chosen by the consumer. The analysis of Bayesian equilibria shows the possibility of three equilibrium classes, only one of which leaves positive utility to the consumer. The classic adverse selection results of these markets are weakened in this situation. We show that cheaper information does not necessarily benefit the consumer but can instead rule out the buyer-friendly and welfare maximizing equilibria. Moreover, making quality search arbitrarily efficient does not lead to sure selling of the high quality product. A sustainable adverse selection effect, though weaker than in the classical model, remains even in the limit.

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    File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-487a.pdf
    File Function: Second version, 2014
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    Bibliographic Info

    Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 487.

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    Length: 49 pages
    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:bie:wpaper:487

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    Related research

    Keywords: Quality uncertainty; Price signaling; Adverse selection; Information acquisition; Two-sided incomplete information;

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    1. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 16(1), pages 43-61, November.
    2. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
    3. Kihlstrom, Richard E, 1974. "A Bayesian Model of Demand for Information About Product Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 99-118, February.
    4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 796-821, August.
    5. Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, Elsevier, vol. 67(2), pages 335-350, November.
    6. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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