Information Gathering Externalities in Product Markets

29 Pages Posted: 13 Oct 2008

See all articles by Heski Bar-Isaac

Heski Bar-Isaac

University of Toronto - Rotman School of Management

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI)

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group; The London School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

Goods and services vary along a number of dimensions independently. Customers can choose to acquire information to assess the quality of some dimensions and not others. Their choices affect firms incentives to invest in quality and so lead to indirect externalities in consumers choices. We illustrate these ideas in a simple model with a monopolist selling a product with two characteristics, investment in quality with stochastic realizations, and heterogeneousconsumers. Consumers in choosing which information to acquire do not consider the effects on firm investment incentives and so there are indirect externalities in information gathering. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers information gathering and thereby firm investment, can paradoxically reduce consumer surplus, profits, and welfare. We briefly consider a number of potential extensions and in particular, highlight a benefit of diversity in tastes.

Suggested Citation

Bar-Isaac, Heski and Caruana, Guillermo and Cuñat, Vicente and Cuñat, Vicente, Information Gathering Externalities in Product Markets (May 2007). NYU Working Paper No. 2451/26049, Available at SSRN: https://ssrn.com/abstract=1281931

Heski Bar-Isaac (Contact Author)

University of Toronto - Rotman School of Management ( email )

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Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI) ( email )

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28014 Madrid
Spain
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://www.vicentecunat.com

The London School of Economics ( email )

United Kingdom

HOME PAGE: http://www.vicentecunat.com

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