Markets where consumers have imperfect product information are pervasive. In many of these markets, because of potentially high externalities, governments, not-for-profit institutions and employers have intervened by providing information to better inform consumers. In the case of child care markets, voluntary bodies and employers have responded by providing consumers with information. Despite the prevalence of various nonadvertising mechanisms for providing information, very little is known about their effectiveness.
This paper exploits a unique feature of child care markets and unique features of our data to study the effects of a non-advertising form of information provision on market outcomes review.
Some child care markets are served by resource and referral agencies (R&Rs) that provide consumers with information on availability, price and observable characteristics of care. To the extent that R&Rs reduce consumer search costs, price competition in markets with R&Rs should differ from that in markets without R&Rs. We employ results from a special survey conducted for this research, which allows us to determine empirically which areas had R&Rs in 1990, the year of our data. We exploit local variation in the availability of these agencies to study the effects of centralized information provision on the distributions of prices and of an observable measure of quality.
We develop a theoretical model that reflects important aspects of the child care market. The model assumes that firms in the market are vertically differentiated. Consumers to engage in costly search to obtain their preferred price and quality combination. We derive conditions under which provision of information reduces price dispersion, maximum price and average price.
The theoretical work indicates that information provision will reduce price dispersion as long as consumers who value quality highly are willing to bear search costs that are at least comparable to the costs bom by consumers who value quality less highly. Markets with lower search costs can only be expected to have lower prices if consumers who value quality highly are willing to bear substantially higher search costs than consumers with lower valuations of quality. Our empirical work is designed to explore the empirical relevance of these theoretical results for child care markets.