Quality Uncertainty with Imperfect Information Acquisition

49 Pages Posted: 20 Oct 2013 Last revised: 5 Sep 2014

See all articles by Christopher Gertz

Christopher Gertz

Bielefeld University - Center for Mathematical Economics

Date Written: September 3, 2014

Abstract

We analyze a monopolistic model of quality uncertainty but with the possibility of information acquisition on the consumer side. Information is costly and its amount is chosen by the consumer. The analysis of Bayesian equilibria shows the possibility of three equilibrium classes, only one of which leaves positive utility to the consumer. The classic adverse selection results of these markets are weakened in this situation. We show that cheaper information does not necessarily benefit the consumer but can instead rule out the buyer-friendly and welfare maximizing equilibria. Moreover, making quality search arbitrarily efficient does not lead to sure selling of the high quality product. A sustainable adverse selection effect, though weaker than in the classical model, remains even in the limit.

Keywords: Quality uncertainty, Price signaling, Adverse selection, Information acquisition, Two-sided incomplete information

JEL Classification: C72, D42, D82, D83

Suggested Citation

Gertz, Christopher, Quality Uncertainty with Imperfect Information Acquisition (September 3, 2014). Institute of Mathematical Economics Working Paper No. 487. Available at SSRN: https://ssrn.com/abstract=2342410 or http://dx.doi.org/10.2139/ssrn.2342410

Christopher Gertz (Contact Author)

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

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