Information and Quality in Expanding Markets
33 Pages Posted: 10 Dec 2010
Date Written: July 10, 2010
Can an increasing number of firms exacerbate problems related to asymmetric information on product quality? We analyze the potential trade-off between variety and information using Salop’s (1979) framework by introducing quality uncertainty and a simple information diffusion process. As the number of firms increases, the marginal benefits of low prices and a wide product variety may be outweighed by a reduction in consumer information and average quality. Thus, the expansion and globalization of markets require a parallel improvement in information mechanisms. Because information has public good characteristics, it is an open question as to how efficiently markets respond to this requirement.
Keywords: Quality, Asymmetric Information, Reputation, Horizontal Differentiation, Market Size
JEL Classification: L13, L15
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