18 Pages Posted: 18 Nov 2004
If buyers cannot observe product characteristics, they search available sellers to find better matches. In this situation, market go-betweens who "manage" a variety of products emerge, offering consumers a variety of trading opportunities which reduce the uncertainty of search and improve the quality of consumer-producer trades. The distribution of the benefits from this intermediation depend critically on the number of products available. When variety is low, increases in capacity heighten competition, thereby lowering prices. On the other hand, with many products on offer, retail firms act monopolistically. In this case, increased capacity raises prices.
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