Prices and Qualities in Markets with Costly Information

This paper extends the seminal work of Akerlof, and Salop and Stiglitz in two directions: (i) the sellers can select both the selling prices and quality levels of their good, and (ii) the buyers can acquire price/quality information about individual sellers at a cost. We observe multiple price/quality combinations in equilibrium, which depend upon the distribution of information costs of consumers and upon whether quality, or price, or both are costly observable. Welfare comparisons of equilibrium are considered. We show that welfare will be greater when price advertising is permitted.