Subsidizing Sequential Search

This paper explores a market model where competing firms use subsidies to reduce the cost of product inspection for consumers. Through a subsidy-sorting principle, the authors demonstrate that higher-quality firms naturally offer larger subsidies to signal their value and secure priority in the search order. This behavior results in a unique equilibrium where low-quality firms are ignored, intermediate firms distinguish themselves through increasing subsidies, and top-tier firms pool at the maximum subsidy cap. The study further examines how AI-mediated platforms can manipulate this dynamic by pricing "inspection tokens" to extract profit. While this platform intervention can lead to excessive...