Competition in Search Markets with Naive Consumers

We study the interplay between quality provision and consumer search in a search market
where firms may design products of inferior quality to promote them to naive consumers
who fail to fully understand product characteristics. We derive an equilibrium in which both
superior and inferior quality is offered and show that as search frictions vanish, the share of
firms offering superior goods in the market goes to zero. The presence of inferior products
harms sophisticated consumers, as it forces them to search longer to find a superior product.
We argue that policy interventions that reduce search frictions such as the standardization
of price and package formats may harm welfare. In contrast, reducing the number of naive
consumers through transparency policies and education campaigns as well as a minimum
quality standard can improve welfare.