Experience Goods and Consumer Search

Abstract

We introduce a search model where products differ in horizontal attributes 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 reduce match values 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 from search. We apply the analysis to online markets, where low search costs coexist with low-quality products. (JEL D11, D21, D83, L15)

Postsearch uncertainty, product heterogeneity, and price divergence

“…On the other hand, our results are in contrast to Chen et al (2022), which concludes that a decrease in search cost discourages quality investment. In their model, there are two periods.…”

“…They investigate the problem of consumer search for experience goods, for which the consumer can verify product quality only after consumption. The main difference between the two papers is that we focus on the separating equilibrium, which allows us to study the price dispersion between high and low‐quality products, whereas in Chen et al (2022), the only plausible equilibrium is a pooling one in which high and low‐quality firms charge the same price. As can be seen more clearly in the model, the main reason behind the different solution concepts lies in the assumption on the distribution of the quality signal.…”

“…Among the studies on consumers' postsearch uncertainty, this paper is most closely related to Chen et al (2022). They investigate the problem of consumer search for experience goods, for which the consumer can verify product quality only after consumption.…”

Hospital Competition When Patients Learn Through Experience

“…In contrast to the observable quality levels, q i t , a patient can only learn v i after choosing Hospital i and receiving care therein. 5 The marginal prior cumulative distribution function for v i is F (v i ), and the density is f (v i ). We assume that F (v i ) and f (v i ) are smooth and continuous in (v, v).…”

“…Instead of learning product-specific valuations through experience, consumers learn product quality, which results from a one-time investment made by the firms at the start of the game. A recent example of this strand is Y Chen et al (2022),. where consumers learn idiosyncratic valuations through inspection but quality only through experience.…”