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It's Good to be Bad. A Model of Low Quality Dominance in a Full Information Consumer Search Market

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Abstract

This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique re ned equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless.

Suggested Citation

  • Stuart Baumann & Margaryta Klymak, 2017. "It's Good to be Bad. A Model of Low Quality Dominance in a Full Information Consumer Search Market," Edinburgh School of Economics Discussion Paper Series 280, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:280
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    References listed on IDEAS

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    1. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
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    3. Fabio Caldieraro & Dongsoo Shin & Andrew Stivers, 2011. "Voluntary Quality Disclosure under Price‐Signaling Competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32, pages 493-504, December.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    More about this item

    Keywords

    Consumer Search; Quality Disclosure;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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