Second-Best Policies in Imperfect Competition : How Improved Information may Lower Welfare

A consumer choosing among brands of a different product gathers information over the relative performance characteristics and prices of the various brands. Even taking prices as known, since information on performance characteristics is costly to gather and process, the consumer will typically base his brand choice on only limited information. In a perfectly competitive market, selecting a brand with only limited information unequivocally lowers consumer welfare for risk-adverse consumers. Ex ante, expected satisfaction falls since performance is now uncertain. Ex post, the "wrong" brand may be purchased. In imperfect competition, however, there is a second effect - prices may rise or fall. Equilibrium prices are jointly determined by the interactions of demands and costs.