Can an increasing number of firms and brands exacerbate problems related to asymmetric information on product quality? This working paper analyzes this trade-off between variety and information using Salop’s (1979) framework by introducing quality uncertainty and a simple information diffusion process.
As the number of firms increases, the marginal benefits of lower prices and wider product variety may be outweighed by a reduction in consumer information and average quality. Thus, market expansions require a parallel improvement in information mechanisms. Because information has public good characteristics, it is an open question as to how efficiently the market may respond to this requirement.