This paper studies a market in which an unique firm selling product with unobservable quality before purchasing(experience goods), large amount of firms selling products with certain quality (search goods) and some heterogeneous consumers obtaining different taste in quality. Search goods competitors drive the price of high-quality goods down and improve surplus of consumers with low valuation of quality (low-end consumers). We point out conditions for an experience goods firm to maintain a high reputation. Compared with the case without competitors, when search goods firms produce at a minimum quality, competition makes it harder for an experience goods firm to sell high quality goods to all consumers. However, it facilitates the experience goods firm to trade with consumers wi...[ Read more ]

This paper studies a market in which an unique firm selling product with unobservable quality before purchasing(experience goods), large amount of firms selling products with certain quality (search goods) and some heterogeneous consumers obtaining different taste in quality. Search goods competitors drive the price of high-quality goods down and improve surplus of consumers with low valuation of quality (low-end consumers). We point out conditions for an experience goods firm to maintain a high reputation. Compared with the case without competitors, when search goods firms produce at a minimum quality, competition makes it harder for an experience goods firm to sell high quality goods to all consumers. However, it facilitates the experience goods firm to trade with consumers with a higher valuation about high quality(high-end consumers). When competition is intensified as search goods firms produce at a higher quality (but still lower than the quality of experience goods), competition can be harmful in sense that no high-quality equilibria can be sustained.