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In this paper we analyze how lower search costs aect …rms'incentives to invest in quality. We identify two con‡icting eects. On the one hand, lower search costs increase incentives to invest in quality by eroding the market share of low quality …rms and increasing the market share of high quality …rms. On the other hand, by intensifying price competition, lower search costs adversely aect high quality …rms more than low quality …rms. The net eect of a change in the search cost on quality is shown to depend on the initial quality distribution. There is a critical value such that, if the average quality in the market is initially above this value, lower search costs lead to lower quality, whereas if the initial quality is below this value, lower search cost leads to higher quality. We show that our results are consistent with a "superstar eect". |
