Deceptive Products and Competition in Search Markets

Résumé

We study a search market where firms have a choice between offering either efficient, high quality (“candid”) products or inefficient, low quality (“deceptive”) products which some (“naive”) consumers misperceive as of high quality. We derive an equilibrium in which both business models co-exist and show that as search frictions vanish, high quality goods are entirely driven out of the market. We show that market share and price dynamics can be non–monotone in search frictions, and we argue that while policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare, a price floor regulation can improve welfare.