Arbeitspapier

Search costs and risky investment in quality

One striking development associated with the explosion of e-commerce is the increased transparency of sellers' quality history. In this paper we analyze how this affects firms' incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer's cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a firm, despite its best efforts, may fail to live up to consumers' more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 2011-04

Classification
Wirtschaft
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Information and Product Quality; Standardization and Compatibility
Subject
search
internet search
quality
risky investment
E-Business
Konsumentenverhalten
Informationskosten
Investition
Produktqualität
Entscheidung bei Unsicherheit
Theorie

Event
Geistige Schöpfung
(who)
Fishman, Arthur
Levy, Nadav
Event
Veröffentlichung
(who)
Bar-Ilan University, Department of Economics
(where)
Ramat-Gan
(when)
2011

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Arbeitspapier

Associated

  • Fishman, Arthur
  • Levy, Nadav
  • Bar-Ilan University, Department of Economics

Time of origin

  • 2011

Other Objects (12)