Competitive Price and Quality Under Asymmetric Information

Gerard J. Tellis, Birger Wernerfelt

We present an analysis of equilibrium in markets with asymmetrically informed consumers. Some consumers know both price and quality of all sellers, whereas others know neither but may search among sellers. The equilibrium correlation between price and quality generally increases with the level of information in the market and can be negative when this level is sufficiently small. A meta-analysis of the available empirical studies strongly supports the model's predictions.

(Price; Quality; Consumer Information)