“Price Transparency in Online Markets ” (Job Market Paper) under review
Advancements in digital technology have increased price transparency, but quality transparency has not improved significantly. It allows more consumers, termed shoppers in our model, to learn prices, but they still need to visit each seller's website to learn its quality. This paper examines the welfare implications of greater price transparency, which increases the proportion of shoppers, in a setting where sellers compete on both price and quality. We find that greater price transparency reduces prices but also leads to lower (and inefficient) quality. Consumers benefit from greater price transparency because it motivates sellers to offer better options to attract shoppers. However, greater price transparency can reduce total welfare if the inefficiency from lower quality significantly reduces sellers’ profits. This happens when sellers can improve quality easily but still choose low quality due to excessive price competition. Finally, we examine the policy implications of quality transparency and resale price maintenance (RPM) and find that neither remedy alone can guarantee welfare improvements, but combining them can always increases consumer surplus and total welfare.
This article analyses a monopoly firm's optimal information revelation strategy and return policy when consumers can choose to either buy immediately without knowing their exact match value or search to learn the exact match value. By paying a return cost which is chosen by the firm, each consumer can return the product and obtain a refund. We find that if the firm is able to give consumers any form of match information, the firm will simply inform each consumer whether or not their match value is above a threshold. This strategy is used as a search deterrence tool, and consumers will just buy directly without knowing the exact match value. The optimal return policy is the one that makes no consumer choose to return the product. The consumer surplus is decreasing in search cost, whereas the total welfare is increasing in search cost. The total welfare reaches the socially efficient level when search cost is large enough, though the consumer surplus is zero in this situation.
“Quality transparency on online platforms”
Consumers often face obstacles when comparing prices on online platforms, and platforms are enhancing quality transparency at the same time. While research has found that price obfuscation increases prices, it remains unexplored whether quality transparency induces sellers to choose higher quality and correspondingly higher prices. We find that quality transparency does not affect competition outcomes. In the absence of quality transparency, as in Diamond (1971), sellers choose the monopoly strategy due to the hold-up problem. With quality transparency, the equilibrium outcome remains unchanged but for different reasons: consumers believe that sellers selecting monopoly quality would choose the monopoly price, still, purchasing from these sellers yields the highest surplus.
“Price Floors in Consumer Search Markets” with Andrew Rhodes (preliminary draft available upon request)
We study resale price maintenance (RPM) in a setting where a manufacturer supplies downstream firms, and some consumers are fully informed about downstream prices while other consumers are not. When the manufacturer puts a floor on the prices that downstream firms can charge, the equilibrium price distribution features both a mass point and a gap. Moreover, as the price floor is increased, the distribution of per-consumer profit improves in the sense of second order stochastic dominance. Using this observation, we prove that the manufacturer's optimal level of RPM completely eliminates downstream price dispersion---and also raises aggregate consumer surplus relative to the case where RPM is not allowed. As such, our paper provides a novel pro-competitive rationale for the use of RPM in settings where consumers have imperfect price information.
“Fake News and Social Media” (draft coming soon)
Social media websites have not only reduced the search cost of consumers to find a news story, but have also enabled fake news producers to spread their stories more easily and widely. This paper proposes a search model to study the effect of a social media website on the spread of fake news, and its influence on consumer surplus. We consider a setting where one unit of consumers search sequentially on a social media website to read at most one news. Assume consumers cannot distinguish between true and fake news, and fake news producers are able to produce stories that good enough to attract consumers. We find that lower search cost induced by the social media website leads to more fake news consumption, but higher consumer surplus.