Guiding Consumers through Lemons and Peaches: An Analysis of the Effects of Search Design Activities

Abstract

The advent of the Internet age has led to questions about the impact of obfuscation and information provision activities by sellers. We estimate the welfare effects of search design activities by an online used car seller, through a dynamic model of search over differentiated offerings. We find that different emphases on product characteristics have a modest impact on consumer welfare (-0.4% to +2.5%) but a relatively high impact on the seller’s (-1.9% to +11.3%). Incentives for information provision are found to be largely aligned between supply and demand. Finally, we find no evidence of consumer myopia in learning.

Keywords: consumer search, information design, correlated attributes, knowledge gradient

JEL Classification: D12, D82, D83