Consumer Search and Optimal Information

Abstract

This paper studies an information design problem in a sequential consumer search environment. Consumers, whose valuation of firms’ products is uncertain, observe a noisy signal about the valuation upon being matched with a firm. The goal is to characterize those signal structures that maximize consumer surplus. We show that the consumer-optimal signal structure can be found within the class of conditional unit-elastic demand signal distributions. A rich set of properties and comparative statics of the consumer-optimal signal distributions are also derived.

Keywords: consumer search, consumer surplus, information design, signal distribution, unit-elastic demand

JEL Classification: D83, L11, L15