Attraction versus Persuasion: Information Provision in Search Markets

TL;DR

This paper models how firms in search markets balance attracting consumers and persuading them through information provision, showing conditions under which full information or dispersed signals emerge in equilibrium.

Contribution

It introduces a model of search market competition with information signaling, revealing how incentives lead to either full information or randomized signals depending on product quality and competition.

Findings

High expected quality leads to full information provision.

Intense competition encourages firms to provide more information.

Equilibrium involves linear payoff functions based on effective value.

Abstract

We consider a model of oligopolistic competition in a market with search frictions, in which competing firms with products of unknown quality advertise how much information a consumer's visit will glean. In the unique symmetric equilibrium of this game, the countervailing incentives of attraction and persuasion yield a payoff function for each firm that is linear in the firm's realized effective value. If the expected quality of the products is sufficiently high (or competition is sufficiently fierce), this corresponds to full information--firms provide the first-best level of information. If not, this corresponds to information dispersion--firms randomize over signals.