30 research outputs found
Diversity and demand externalities: How cheap information can reduce welfare
Goods and services vary along a number of dimensions independently. Customers can choose to acquire information on the quality of some dimensions and not others. Their choices affect firms’ incentives to invest in quality and so lead to indirect externalities
in consumers’ choices. We illustrate these ideas in a simple model with a monopolist selling a product with two characteristics, investments in quality with stochastic realizations and heterogeneous consumers. A fall in the cost of acquiring information on the quality of one characteristic leads more consumers to verify that characteristic. Consequently, the firm may under-provide quality on the other. This may paradoxically reduce consumer surplus, profits and welfare. Our discussion concludes with a number of potential extensions and applications of the basic framework
Information Gathering and Marketing
Consumers have only partial knowledge before making a purchase decision, but can choose
to acquire more detailed information. A Örm can make it easier or harder for these consumers to obtain such information. We explore consumersíinformation gathering and the Örmís integrated strategy for marketing, pricing, and investment in quality. In particular, we highlight that when consumers are ex-ante heterogeneous, the Örm might choose an intermediate marketing strategy
for two quite di§erent reasons. First, it serves as a non-price means of discriminationó it can make information only partially available, in a way that induces some, but not all, consumers to acquire the information. Second, when the Örm cannot commit to a given investment in quality,
it can still convince all consumers of its provision by designing a pricing and marketing policy that induces some consumers to actively gather further information. This mass of consumers, in exchange, is su¢ ciently large to discipline the monopolist to invest in the quality of the
product
Search, Design, and Market Structure
The Internet has made consumer search much easier with consequences for
competition, industry structure and product offerings. We explore these
consequences in a rich but tractable model that allows for strategic
design choices. We find a polarized market structure, where some firms
choose designs aiming for broad-based audiences, while others target
narrow niches. Such an industry structure can arise even when all firms
and consumers are ex-ante identical. We perform comparative statics and
show the effect of a fall in search costs on the designs, market shares,
prices, and profits of different firms. In particular, a fall in search
costs, through the effect on product designs, can lead to higher
industry prices and profits. In characterizing sales distributions, our
analysis is related to discussions of how the Internet has led to the
prevalence of niche goods and the long tail and superstar phenomena
Search, Design, and Market Structure
The Internet has made consumer search much easier with consequences for
competition, industry structure and product offerings. We explore these
consequences in a rich but tractable model that allows for strategic
design choices. We find a polarized market structure, where some firms
choose designs aiming for broad-based audiences, while others target
narrow niches. Such an industry structure can arise even when all firms
and consumers are ex-ante identical. We perform comparative statics and
show the effect of a fall in search costs on the designs, market shares,
prices, and profits of different firms. In particular, a fall in search
costs, through the effect on product designs, can lead to higher
industry prices and profits. In characterizing sales distributions, our
analysis is related to discussions of how the Internet has led to the
prevalence of niche goods and the long tail and superstar phenomena