Question

Jackie is managing a company in an industry with many buyers and sellers, no externalities, and free entry and exit. However, the different companies in the industry produce goods of different qualities and these qualities are costly for consumers to observe before purchase. Consumers do value the higher quality goods more highly. Relative to a market with homogeneous goods and perfect information, what should Jackie expect to be true about price and profitability in her industry? How does the magnitude of the costs (to observe the quality of the goods) for consumers affect the industry in equilibrium?

Answer 1