On the Welfare Efects of Transparency Under Targeted Product Design

The welfare impact of market transparency is analyzed under endogenous product design. To that end, we consider a model of spatial product dierentiation with price-dependent demand. With an exogenous number of firms, we find that, from the social welfare perspective, equilibrium brand design is excessively targeted (too tailored to niche consumers) for high levels of transparency, but it is insuficiently targeted (so that brands are too generic) for low levels of transparency. Under endogenous entry we show that, in contrast with previous contributions, the likelihood of excessive entry is not necessarily decreasing with the level of transparency. In fact, we show that, for large demand elasticities, the range of market sizes with excessive entry is non-monotonic in the level of transparency: it is increasing below a critical level of transparency, and decreasing beyond that level