Learning Match Quality

Abstract

For many new products or products with multiple attributes, learning the price is often easier than learning one's willingness to pay. We model a market in which consumers face a transportation cost to discover a seller's price, and then have the option to pay a learning cost to discover the product's match value before deciding whether to purchase or continue searching. In equilibrium 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. From a platform design perspective, we find that consumers are better off from clear disclosure for products with low learning costs and from obfuscation for products with high learning costs.

Keywords: search, learning match value, learning costs, preemption price, Obfuscation