Since Telser (1960), there is a well-established argument that a competitive market will not provide service due to freeriding. We show that with search frictions, the market may well provide service if the cost of doing so is not too large. Any market equilibrium with service provision has two or more firms providing service, implying overprovision of service as the social optimum mandates at most one service provider. Firms that provide service and those that do not can coexist, where consumers direct their search to service providers first to obtain service, and to nonservice providers later to enjoy lower prices.
Janssen, Maarten C. W., and T. Tony Ke.
"Searching for Service."
American Economic Journal: Microeconomics,
Consumer Economics: Theory
Firm Behavior: Theory
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Vertical Restraints; Resale Price Maintenance; Quantity Discounts
Retail and Wholesale Trade; e-Commerce