It is most likely to lower the dispersion of prices. Information provision will lower price dispersion if information asymmetries are severe and consumers’ willingness to search is positively correlated with consumers’ valuations of quality. If consumers’ willingness to search is sufficiently positively correlated with their valuations of quality, information provision may also reduce maximum and average prices. However, as we have shown in the case of child care markets, information may not significantly affect average prices or the average level of observable quality.
To structure our empirical work, we develop a theoretical model that allows us to discern the effects of information on the price distribution in a vertically differentiated market. We hope that this work will encourage theorists to consider further the implication of information provision in markets with complicated structures like the health and dependent care markets further.
In terms of empirical methods, we use carefully defined local markets as well as individual firms as the unit of observation. The use of well-defined markets is important because the strongest prediction of theory relates to price dispersion. We can only observe the dispersion of prices at the market level. As far as we are aware, there is only one other study that considers the effect of information on price dispersion. This study finds that the dispersion of prices in states that allow advertising of prices for eye examination is lower than the dispersion of prices in states that prohibit such advertising (Feldman and Begun, 1980). Markets for eye examinations like markets for child care are likely to be local not statewide. It would be interesting to see if price dispersion in carefully defined local markets were also to be lower in states that allow advertising. Finally, our study is only the second to explicitly examine the effects of information on the distribution of observable product quality. For previous work, see Kwoka (1984).
We conclude that provision of information by R&Rs can significantly alter competition in child care markets. The findings suggest that centralized information provision may indeed be useful in alleviating some market imperfections arising from information imperfections. Most directly, information provision lowers consumer search costs. The theoretical model suggests that information provision may also increase market participation. Both our theoretical and empirical work indicate that R&Rs can reduce price dispersion without eroding staff/child ratios in markets with substantial information imperfections.
Our work also cautions that enthusiasm for information provision as a means to solve market imperfections must be tempered. For example, our work indicates that information provision does not significantly lower average price or increase quality as measured by the staff-child ratio. Further, we are not able to study the effect of the increased price competition that can be engendered by information provision on unobservable quality.