Subsidizing Sequential Search

2026-05-27

AI Summary

This study investigates the competitive dynamics through which firms vie for consumer attention in sequential search markets by subsidizing inspection costs. Building on game theory and mechanism design, and employing equilibrium refinements such as the intuitive criterion, the paper develops a dynamic model of consumer search and firm subsidies. Its primary contribution is the formulation of a “subsidy-ranking principle” that characterizes a unique refined equilibrium: low-quality products are never inspected; medium-quality products are separated via strictly increasing subsidies; and high-quality products pool through full subsidies—thereby maximizing information revelation and inspection efficiency. The analysis further extends to AI-mediated platforms, showing that while linear pricing induces excessive inspection, it does not impair consumer welfare, merely reallocating surplus between sellers and the platform.

Abstract

We study markets where firms compete for consumer attention by subsidizing costly product inspection. These subsidies do not change product quality, but they alter the order in which consumers search by lowering inspection costs. We establish a subsidy-sorting principle: in any equilibrium, higher-quality firms provide weakly larger subsidies, leading consumers to search in descending subsidy order. A unique equilibrium survives forward-induction reasoning in the spirit of the Intuitive Criterion: low-quality firms are never inspected, intermediate-quality firms separate with strictly increasing subsidies, and high-quality firms pool at the full subsidy. This equilibrium maximizes information revelation among all possible outcomes and ensures efficient inspection. We then extend the analysis to AI-mediated platforms that can create and price inspection tokens. The platform's optimal linear pricing leads to excessive inspection relative to the social optimum. While this distortion does not reduce consumer welfare, it reallocates surplus from sellers to the platform and consumers.

Problem

• sequential search
• subsidy
• consumer attention
• inspection cost
• AI-mediated platform

Innovation

• sequential search
• subsidy sorting
• inspection tokens
• Intuitive Criterion
• AI-mediated platforms