Quality-Adjusted Consumer Surplus for Markets with Asymmetric Information

Traditional measures of consumer surplus (CS) have implicitly assumed that the quality expected is the same as the quality that is paid for ex ante. However, when product or service quality cannot be perfectly verified ex-ante by consumers in markets with asymmetric information, and actual quality received may not necessarily equal quality expected, CS would not be precisely measured. This may lead to either over-estimation or under-estimation of the real level of CS, thus misrepresenting the true surplus markets render to consumers. In this paper, we propose a quality-adjusted measure of CS for markets with asymmetric information. We first relax the assumption that consumers always receive the quality they expect ex ante. Second, we leverage expectation-confirmation theory to construct the utility function to derive the proposed quality-adjusted measure of CS.