The Effect of Information on the Well-Being of the Uninformed: What's the Chance of Getting a Decent Meal in an Unfamiliar City

Abstract

We consider a market in which some consumers are fully informed about the quality of a product sold by different firms, while other consumers are uninformed. We examine the effects on the prices and qualities offered in the market of increasing the fraction of informed consumers. In equilibrium, three firm types can exist - high-price/high-quality, low-price/low-quality, and high-price/low-quality. The third firm type exploits the uninformed by mimicking the high-quality type's price, but provides low quality. We find that increasing the fraction of informed consumers can make the uninformed worse off by changing the mix of firms to the detriment of the uninformed.

Keywords: Consumer Information, Product Quality, Search

JEL Classification: L150, D830