Information and Quality with an Increasing Number of Brands

ABSTRACT We analyze the potential trade-off between product variety and consumer information and the implications this trade-off has for product quality. We introduce a simple information accumulation process in a horizontal differentiation model with unobservable quality. As the number of brands increases, per-brand consumer information decreases, which leads to lower average quality. Eventually, the reduction in quality can outweigh the marginal welfare benefits of greater product variety. Thus, the continuous increase in the number of brands requires a parallel improvement in consumer information mechanisms. It remains to be answered how efficiently new information mechanisms respond to this requirement in each market