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A Search Model of Experience Goods

Chen, Yongmin and Li, Zhuozheng and Zhang, Tianle (2019): A Search Model of Experience Goods.

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We present a model in which consumers can learn about product varieties through search but cannot observe product quality before purchase. As search cost increases, search intensity and competition decrease, but the resulting higher price leads to higher return for quality investment and to more high-quality firms. The quality effect can dominate so that a higher search cost boosts both consumer and social welfare. In contrast, if product quality were observed before purchase, welfare would monotonically decrease in search cost. Our results show that the observability of product quality is an important determinant of how search frictions impact market performance.

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