Efficient Learning under Competition

Abstract

This paper examines the efficiency of markets where consumers privately acquire costly information about product fit before purchasing. In a departure from the inefficiency result found in the monopoly setting of Ravid, Roesler, and Szentes (2022), we show that duopolistic competition can restore ex post efficiency as information costs vanish. The core economic mechanism is that competition limits firms' ability to fully extract consumer surplus based on learned preferences (mitigating the hold-up problem), thereby preserving consumer incentives to acquire information that leads to efficient matching, even when information is arbitrarily cheap. We also find that the relationship between information costs and consumer welfare is non-monotonic: reducing frictions can harm consumers when information is already cheap, by intensifying the hold-up problem that competition only partially resolves.