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Product Quality and Imperfect Information

Alan Schwartz^1,2,3; Louis L. Wilde²

¹ University of Southern California · ² California Institute of Technology · ³ Southern California Reproductive Center

This paper considers markets in which consumers are imperfectly informed about both product prices and quality levels offered by firms. We characterize necessary and sufficient conditions for existence of the various equilibrium configurations of price and quality that can arise in two paradigm cases; when all consumers prefer higher quality and when all consumers prefer lower quality. Our results suggest that firms will exploit imperfect information by charging noncompetitive prices as well as by offering other than ideal quality in the former case, but only by changing noncompetitive prices in the latter case.

DOI

10.2307/2297620

Volume

52 (2)

Pages

251

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