Consumer Search, Price Dispersion, and Post-search Uncertainty over Product Quality by Yijuan Chen, Xiangting Hu and Sanxi Li
We study a consumer search model in which a consumer may remain uncertain about product quality even after she inspects the product. We show that, with the consumer's post-search uncertainty over product quality, the products' horizontal diversity can interact with vertical diversity to impact on price dispersion. When horizontal diversity is smaller than vertical diversity, a lower search cost can increase price dispersion by raising the price of the high-quality product while reducing the price of the low-quality one. On the other hand, price dispersion may narrow when the post-search uncertainty decreases. The theoretical results help reconcile seemingly contrasting empirical findings on price dispersion.