Information Asymmetry and Search Intensity

TL;DR

This paper challenges the conventional view by showing that consumers might benefit from not observing sellers' marginal costs, as it leads to more intense search and lower prices due to increased competition.

Contribution

It introduces a model demonstrating that lack of cost information can lead to more competitive search behavior and lower prices, contrary to previous beliefs.

Findings

Consumers search more intensely without cost information.

More intense search results in higher competitive pressure.

Consumers benefit from lower prices when costs are unobserved.

Abstract

The existing studies on consumer search agree that consumers are worse-off when they do not observe sellers' production marginal cost than when they do. In this paper we challenge this conclusion. Employing a canonical model of simultaneous search, we show that it may be favorable for consumer to not observe the production marginal cost. The reason is that, in expectation, consumer search more intensely when they do not know sellers' production marginal cost than when they know it. More intense search imposes higher competitive pressure on sellers, which in turn benefits consumers through lower prices.