This paper analyses the impact of a quality improving technological shock on terms of trade in a search economy. Firms produce a unit good and decide on both its quality and price. Consumers search for the best offer. Some of them can assess the product quality before buying it, the other cannot. Several types of Nash equilibria are put forward, in keeping with the proportion of experts in the population of consumers. For instance, if the proportion of experts is not too small, nor too large, in equilibrium firms may decide to produce high quality goods, but post the pre-shock low price. A mixed strategy equilibrium, where all firms produce high quality goods, but some of them post the low price while the other post a higher price, may also emerge. In both these configurations, consumers reap a positive surplus.
BESANCENOT, D. and VRANCEANU, R. (2001). Quality Leaps and Price Distribution in an Equilibrium Search Model. ESSEC Business School.