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Quality Uncertainty with Imperfect Information Acquisition

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  • Gertz, Christopher

    (Center for Mathematical Economics, Bielefeld University)

Abstract

We analyze a monopolistic model of quality uncertainty but with the possibility of information acquisition on the consumer side. Infor- mation 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.

Suggested Citation

  • Gertz, Christopher, 2016. "Quality Uncertainty with Imperfect Information Acquisition," Center for Mathematical Economics Working Papers 487, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:487
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    File URL: https://pub.uni-bielefeld.de/download/2901454/2901455
    File Function: First Version, 2014
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    References listed on IDEAS

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    1. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
    2. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    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, vol. 15(1), pages 99-118, February.
    4. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    5. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    6. Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, vol. 67(2), pages 335-350, November.
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    Cited by:

    1. Gertz, Christopher, 2016. "A Model of Quality Uncertainty with a Continuum of Quality Levels," Center for Mathematical Economics Working Papers 522, Center for Mathematical Economics, Bielefeld University.

    More about this item

    Keywords

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

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