Consumer Search and Information Intermediaries

In this paper we model the market for a homogeneous good and examine the role of information in determining market outcomes. Unlike in Baye and Morgan (2001) where consumers can only learn about the prices charged by different firms by subscribing to an information intermediary’s service, we allow consumers to shop for price quotes. We are interested in determing the impact on market outcomes of allowing for this additional means of information acquisition. Relative to the case where consumers have no interest in searching for prices, consumers become no better off as the cost of search falls. The intermediary, in an effort to compensate for the loss of revenue that it might have earned from consumers, increases the fees that it charges to firms for the right to advertise their product through it. As a result, fewer firms advertise in equilibrium, and so, those that do post higher prices, and, in expectation, consumers pay more for the product. The price increase appropriates all of the gains in consumer surplus generated by the decrease in the cost of search.