With perfect information, there is no quality issue.
Organic foods would be just like any other product.
In equilibrium, consumers will buy organic foods
if the marginal utility per dollar they derive from
them is at least equal to that of their other purchases.
Producers will enter the market until there
are no more opportunities to exploit economic
profits.
An extensive-form game for a search good is
shown in figure 1. In figure 1, the last two rows of
the game tree are the payoffs to the players. The
upper payoff is to the producer; the lower payoff is
to the consumer. The producer’s payoff is in dollar
units and can be thought of as price less cost. The
consumer’s payoff is in terms of utility. I assume
generally that it is more expensive to produce using organic methods. This notation and these conventions
will be followed throughout the analysis.
The equilibrium concepts that will be used in
this analysis are Nash equilibrium and subgame
perfect Nash equilibrium. A Nash equilibrium exists
if each player is employing his or her optimal
strategy given all the other players’ strategies. In
other words, each player chooses to play his or her
best response to what everyone else is doing. A
subgame perfect Nash equilibrium exists when the
players’ strategy choices result in a Nash equilibrium
in every subgame. A consequence of this
equilibrium refinement is that all threats must be
credible