Vertical Differentiation in Monetary Search-Theorectic Models-Revisited

In this article, the discussion on quality levels in the monetary search theoretical model is extended. By having quality levels endogenously determined, we found that whether money holders have quality preferences is crucial to the results. While the effect of the fraction of money on quality levels is consistent with current literature, the effect of the economy's quality preferences on quality drives the quality levels to opposite directions. Overall, welfare is improved under several conditions. The results found in this exercise can be regarded as complementary to the findings in Trejos (1999)