Limits of Disclosure in Search Markets

TL;DR

This paper analyzes how different consumer types influence firms' disclosure strategies in search markets, revealing that equilibrium disclosure is partial and affected by market size and search costs, with complex welfare implications.

Contribution

It introduces a model distinguishing savvy and inexperienced consumers, showing how their incentives shape disclosure and market outcomes in search markets.

Findings

Firms always conceal low valuations in large markets.

Inexperienced consumers search actively only in small markets.

Search cost reductions can both increase or decrease welfare depending on their level.

Abstract

This paper examines competitive information disclosure in search markets with a mix of savvy consumers, who search costlessly, and inexperienced consumers, who face positive search costs. Savvy consumers incentivize truthful disclosure; inexperienced consumers, concealment. With both types, equilibrium features partial disclosure, which persists despite intense competition: in large markets, firms always conceal low valuations. Inexperienced consumers may search actively, but only in small markets. While savvy consumers benefit from increased competition, inexperienced consumers may be harmed. Changes in search costs have non-monotone effects: when costs are low, sufficient reductions increase informativeness and welfare; when costs are high, the opposite.