Information Gathering Externalities in Product Markets

29 Pages Posted: 26 Aug 2007

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

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 heterogeneous consumers. 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.

Keywords: information gathering, diversity, externalities

JEL Classification: D83, L15

Suggested Citation

Bar-Isaac, Heski and Caruana, Guillermo and Cuñat, Vicente, Information Gathering Externalities in Product Markets (May 2007). Available at SSRN: https://ssrn.com/abstract=1008302 or http://dx.doi.org/10.2139/ssrn.1008302

Heski Bar-Isaac (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 978 3626 (Phone)

HOME PAGE: http://https://sites.google.com/site/heskibarisaac/home

Guillermo Caruana

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

Casado del Alisal 5
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

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