Ruhr Economic Papers

Ruhr Economic Papers #887

Increasing Consumer Surplus through a Novel Product Testing Mechanism

by Ulrike Vollstaedt, Patrick Imcke, Franziska Brendel and Christiane Ehses- Friedrich

UDE, 12/2020, 86 S./p., 10 Euro, ISBN 978-3-96973-026-3 DOI: 10.4419/96973026

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Abstract

Our study proposes a novel mechanism to reduce information asymmetry about product quality between buyers and sellers. Product testing organizations like Consumer Reports (US) and Stiftung Warentest (Germany) seek to reduce this asymmetry by providing credible information. However, limited capacity leads to testing of only a select number of product models, often bestsellers, which can yield suboptimal information. After outlining our mechanism, we develop a game to derive testable predictions. We show theoretically that a unique Nash equilibrium exists in which our mechanism yields optimal information, equivalent to a world of complete information, while selecting bestsellers does not. Subsequently, we confirm experimentally that our mechanism increases consumer surplus.

JEL-Classification: C72, C91, D82, L15

Keywords: Consumer surplus; information asymmetry; product quality; product test; information disclosure; mechanism design; experiment

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