Consumer Information, Equilibrium Industry Price, and the Number of Sellers
Volume: Volume 10, No. 2
Issue: Autumn 1979
Pages: pp. 483-502
Authors: Mark A. Satterthwaite
Title: Consumer Information, Equilibrium Industry Price, and the Number of Sellers
Abstract: Define a reputation good to be any product or service for which sellers' products are differentiated and consumers' search among sellers consists of a series of inquiries to relatives, friends, and associates for recommendations. Examples of reputation goods are personal legal services and primary medical care. The paper shows that if a monopolistically competitive industry sells a reputation good, then an increased number of sellers may perversely cause the industry's equilibrium price to rise. This result is based on maximizing behavior on both sides of the market: consumers are assumed to search rationally and sellers are assumed to profit maximize.
JEL Classification
Microeconomic Theory General (0220)