Learning Match Quality

18 Pages Posted: 19 Apr 2016

See all articles by Arthur Fishman

Arthur Fishman

Bar-Ilan University - Department of Economics

Dmitry Lubensky

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: April 17, 2016

Abstract

A consumer with unit demand sequentially visits sellers of competing products for which her private values are uncertain. She can learn each value at a cost or purchase any of the products without learning. Each seller optimally sets either a "regular" price which induces a visiting consumer to learn or a sufficiently low "preemption" price which induces the consumer to accept immediately. In contrast to the common intuition about search frictions, we find that higher learning costs can improve consumer welfare by increasing sellers' incentive to preempt, which lowers prices and increases sales. We also demonstrate that the incentive to preempt is lower in a monopoly than in an oligopoly, and in a uniform example show that welfare and consumer surplus are higher in a monopoly for a range of learning costs.

Keywords: Demand Rotation, Search, Learning, Differentiated Products

Suggested Citation

Fishman, Arthur and Lubensky, Dmitry, Learning Match Quality (April 17, 2016). Kelley School of Business Research Paper No. 16-33. Available at SSRN: https://ssrn.com/abstract=2765999 or http://dx.doi.org/10.2139/ssrn.2765999

Arthur Fishman

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

Dmitry Lubensky (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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