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Effects of Information Provision in an Vertically Differentiated Market

37 Pages Posted: 26 Aug 2000  

Tasneem Chipty

Ohio State University

Ann Dryden Witte

Wellesley College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1998

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

Chipty, Tasneem and Witte, Ann Dryden, Effects of Information Provision in an Vertically Differentiated Market (April 1998). NBER Working Paper No. w6493. Available at SSRN: https://ssrn.com/abstract=226238

Tasneem Chipty (Contact Author)

Ohio State University ( email )

410 Arps Hall
Columbus, OH 43210-1172
United States
614-292-2051 (Phone)
614-292-3906 (Fax)

Ann Dryden Witte

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wellesley College - Department of Economics ( email )

106 Central Street
Wellesley, MA 02181
United States
781-283-2163 (Phone)
781-283-2177 (Fax)

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