INFORMATION PROVISION: Model 3

Posted by Kathryn Schwartz on July 11, 2014
INFORMATION PROVISION

With probability Vi, consumers arrive first at the high quality provider. These consumers buy from this
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Imperfect information reduces market participation because consumers must bear search costs as well as direct care costs in order to obtain care for their children. As shown in the next section, when consumers have full information, consumers with 0 < — do not participate in the market. With imperfect information, these consumers remain out of the market. However, additional consumers drop out as well. To be precise, those consumers who value quality lowly but by chance wind up first at the high quality provider, i.e. with probability
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To solve for the Nash equilibrium in prices, we determine expected market shares for each firm. Expected market shares for the low and the high quality firms, respectively, are:
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