Information Costs, Intermediation and Equilibrium Price

mainly for the sake of simplicity. More important is the realization that markets do indeed differ significantly in the ways consumers can obtain information. In some markets there are brokers, test magazines, leasing companies, etc., which serve to alleviate the information problem facing the buyers. In other markets word-of-mouth recommendations and advertising are the only sources of information available. It seems reasonable to suppose that the presence of informational intermediaries has some effect on market structure and performance. It is thus of interest to analyse the structural differences that are responsible for the fact that certain types of intermediaries can be observed in some markets but not in others. In this paper we develop a model that determines endogenously the type of information available to the consumers. The exercise is of interest because it constitutes an attempt to determine market structure endogenously as a function of more fundamental underlying factors. The exercise is also quite difficult, because it involves the comparison of different regimes: in this case, the comparison of situations with and without informational intermediaries. Comparisons of regimes are notoriously difficult to make in explicit models. We are able to do so here largely because we use a sufficiently simple model based on quite restrictive assumptions. We hope the resulting loss in terms of generality is more than compensated for by the gain in terms of computational ease.