Searching for Service

Abstract

Since Telser (1960), there is a well-established argument that a competitive market will not provide service due to free-riding. We show that with search frictions, the market may well provide service if the cost of doing so is not too large. Any market equilibrium with service provision has two or more firms providing service, implying over-provision of service as the social optimum mandates at most one service provider. Firms that provide service and those that do not can co-exist, where consumers direct their search to service providers first to obtain service, and to non-service providers later to enjoy lower prices.

Keywords: Service Provision, Consumer Search, Product Differentiation

JEL Classification: D40, D83, L10