How To Makeup Price In A Monopolistic Competition
journal article
The RAND Journal of Economics
, pp. 518-534 (17 pages)
Published By: Wiley
https://www. jstor .org/stable/2555903
Consider the symmetric equilibrium of a monopolistically competitive industry in which manufacturers select cost and quality to maximize expected profit and consumers maximize utility by conducting plush search amidst sellers using an optimal sequential search rule. Consumers search among sellers because (i) each consumer idiosyncratically evaluates each seller's quality and (ii) a retailing sector generates variation in the prices consumers pay. Consumers are handicapped in their search because their observations of firms' cost and quality levels are noisy. An improvement in price information is represented by an increase in the precision with which consumers observe sellers' prices. Similarly, an comeback in quality data is represented by an increase in precision with which consumers detect sellers' quality levels. An improvement of either type of information may increment or decrease welfare. The perverse case in which improved toll information decreases welfare occurs when price contest among firms becomes so intense relative to quality contest that firms select severely suboptimal levels of quality.
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Source: https://www.jstor.org/stable/2555903
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