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Effects of Information Provision in an Vertically Differentiated Market

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  • Tasneem Chipty
  • Ann Dryden Witte

Abstract

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.

Suggested Citation

  • Tasneem Chipty & Ann Dryden Witte, 1998. "Effects of Information Provision in an Vertically Differentiated Market," NBER Working Papers 6493, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6493
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    References listed on IDEAS

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    1. 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 337-352, October.
    2. 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.
    3. Chipty, Tasneem, 1995. "Economic Effects of Quality Regulations in the Day-Care Industry," American Economic Review, American Economic Association, vol. 85(2), pages 419-424, May.
    4. Mocan, H Naci, 1995. "Quality-Adjusted Cost Functions for Child-Care Centers," American Economic Review, American Economic Association, vol. 85(2), pages 409-413, May.
    5. repec:cor:louvrp:-752 is not listed on IDEAS
    6. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-858, August.
    7. Gabsewicz, Jean J. & Garella, Paolo G., 1987. "Price search and spatial competition," European Economic Review, Elsevier, vol. 31(4), pages 827-842, June.
    8. Peter Diamond, 1987. "Consumer Differences and Prices in a Search Model," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 429-436.
    9. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
    10. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    11. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    12. 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 487-492, July.
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    Cited by:

    1. Magali Delmas & Maria J. Montes-Sancho & Jay P. Shimshack, 2010. "Information Disclosure Policies: Evidence From The Electricity Industry," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 483-498, April.
    2. Rezende, Marcelo, 2010. "The effects of accountability on higher education," Economics of Education Review, Elsevier, vol. 29(5), pages 842-856, October.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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