Industry-optimal Information in a Search Market
54 Pages Posted: 5 Oct 2021 Last revised: 19 Dec 2022
Date Written: December 14, 2022
This paper studies the welfare effects of information in a sequential consumer search environment. Consumers search in the market and observe a noisy signal about the match value upon being matched with a firm, based on which they make their purchasing decisions. We construct the class of conditional unit-elastic demand signal distributions such that every equilibrium that can possibly arise under a feasible signal distribution can be achieved by a signal distribution within this class, based on which we investigate the industry-optimal information in this market. Contrary to the conventional wisdom that lower search cost promotes competition and reduces industry surplus, we find that the optimal industry surplus is strictly increasing as the search cost decreases. We also characterize the industry-optimal signal distribution for a large class of value distributions.
Keywords: consumer search, information design, welfare limit, industry-optimal design, full surplus extraction
JEL Classification: D83, L11, L15
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