Competitive equilibria in markets for heterogeneous goods under imperfect information: a theoretical analysis with policy implications

Abstract

This article characterizes necessary and sufficient conditions for heterogeneous search goods to trade at their competitive prices, and derives policy implications from these conditions. The model differs from earlier search equilibrium models in that it allows the existence of product heterogeneity. Our principal conclusions are that markets for heterogeneous search goods tend rather easily to segment into homogeneous subsets; when they do not, heterogeneity can work against the existence of competitive equilibria because it dilutes the effectiveness of search. Nevertheless, the likelihood of competitive equilibria obtaining in heterogeneous search goods markets can often be increased by reducing the costs to consumers of directly comparing purchase alternatives.