Posted by Kathryn Schwartz on July 09, 2014

The demand side of the market consists of a continuum of consumers indexed by taste parameter 6 and uniformly distributed on [0,1]. We follow Rob (1985), Schwartz and Wilde (1985), and Chan andLeland (1986) and assume that consumers have different levels of willingness to search. In child care markets, parents’ willingness to search may vary with tastes and preferences, the perceived vulnerability of the child, the opportunity cost of time spent searching, the out-of-pocket costs of search, and the parents’ ability to process information. For simplicity, we assume that search costs, denoted x, can take one of two values: zL for parents with high willingness to search (i.e. low search costs) and xH for parents with low willingness to search (i.e. high search costs). Parents decide whether or not to buy, making no purchase or else buying from exactly one of the firms in the market. The value a consumer of type 0 places on quality level q is v(q, Qj = dq. The surplus of consumer 0 who purchases quality q and pays price p is therefore given by Qq – p.

Equilibrium with Imperfect Information

As in Gabszewicz and Garella (1987) we assume that at the start of their decision making process, consumers know only the average price and average quality level in the market. Each consumer searches at least once, with an equal chance of arriving at either the high or low quality provider. Upon arriving at the first provider, the consumer obtains full information. The consumer then decides whether to drop out of the market, whether to stay and purchase at the first provider, or whether to go to the other provider. Going to the second provider requires a transaction or search cost of Te . As argued earlier, те may vary with the consumer’s type either because consumers have different willingness to bear the time and money costs of additional search or because time and monev costs of search varv across consumers. Here, we assume that there are onlv two levels

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