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Effects of Information Provision in an Vertically Differentiated Market

  • Tasneem Chipty
  • Ann Dryden Witte
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    We study the effects of consumer information on equlibrium market prices and observable product quality in the market for child care. Child care markets offer a unique opportunity to study these effects because of the existence of resource and referral agencies (R&Rs) in some markets. R&Rs provide consumers with information on availability, price, and observable characteristics of care. To understand the effects of information provision in markets like child care, we examine the effects of information provision in a model of vertical differentiation. We show conditions in which increased consumer information reduces price dispersion, maximum price, and average price. With this model we examine empirically the effects of R&Rs on the distribution of child care prices and on the distribution of staff-child ratios. We estimate separate models for the distribution of prices and staff-child ratios for infants, toddlers, preschoolers and school age children because of regulatory and care differences across age groups. We find that R&Rs have economically large and statistically significant effects on the distribution of prices for the care infants and toddlers. Geographic markets with R&Rs have significantly less price dispersion and lower maximum prices. There is also some evidence that markets with R&Rs have lower average prices.Information provision via R&Rs has no significant effects on staff-child ratios. These findings are generally consistent with search theory and support the contention that information provision can intensify price competition.

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    File URL: http://www.nber.org/papers/w6493.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6493.

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    Date of creation: Apr 1998
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    Handle: RePEc:nbr:nberwo:6493
    Note: CH PE
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    1. GABSZEWICZ, Jean J. & GARELLA, Paolo G., . "Price search and spatial competition," CORE Discussion Papers RP -752, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Diamond, Peter, 1987. "Consumer Differences and Prices in a Search Model," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 429-36, May.
    4. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    5. Feldman, Roger D & Begun, James W, 1980. "Does Advertising of Prices Reduce the Mean and Variance of Prices?," Economic Inquiry, Western Economic Association International, vol. 18(3), pages 487-92, July.
    6. Chipty, Tasneem, 1995. "Economic Effects of Quality Regulations in the Day-Care Industry," American Economic Review, American Economic Association, vol. 85(2), pages 419-24, May.
    7. H. Naci Mocan, 1995. "Quality Adjusted Cost Functions for Child Care Centers," NBER Working Papers 5040, National Bureau of Economic Research, Inc.
    8. Tasneem Chipty & Ann Dryden Witte, 1997. "An Empirical Investigation of Firms' Responses to Minimum Standards Regulations," NBER Working Papers 6104, National Bureau of Economic Research, Inc.
    9. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
    11. Rob, Rafael, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 487-504, July.
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