Experience Goods and Consumer Search

Abstract

We introduce a search model where products differ in variety and unobserved quality (`experience goods'), and firms can establish quality reputation. We show that the inability of consumers to observe quality before purchase significantly changes how search frictions affect market performance. In equilibrium, higher search costs hinder consumers' search for better-matched variety and increase price, but can boost firms' investment in product quality. Under plausible conditions, both consumer and total welfare initially increase in search cost, whereas both would monotonically decrease if quality were observable. We apply the analysis to online markets, where low search costs coexist with low-quality products