It's Good to be Bad: A Model of Low Quality Dominance in a Full Information Consumer Search Market

This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal... [ view full abstract ]

This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique refined equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless.