Can Information Products Be Complements?

15 Pages Posted: 9 May 2015

See all articles by Andrew T. Ching

Andrew T. Ching

Johns Hopkins University - Carey Business School

Ignatius J. Horstmann

University of Toronto - Rotman School of Management; University of Toronto - Institute for Policy Analysis

Hyunwoo Lim

York University

Date Written: May 7, 2015

Abstract

In "Marketing Information: A Competitive Analysis,'' Sarvary and Parker (1997) (S&P) [Marketing Science, 16(1): 24-38] argue that, a reduction in the price of one information product can lead to an increase in demand for another information product -- information products can be gross complements -- if they are sufficiently unreliable. We show that S&P obtain this surprising result by implicitly making the following internally inconsistent assumptions: (i) after purchasing information products, consumers update their beliefs using Bayesian updating rule and act as if they have a diffuse initial prior (i.e., their initial prior variance is infinity before receiving any information); (ii) but if consumers choose not to purchase any information product, it is assumed that their initial prior variance is 1 (implied by the utility function specification and that utility of no purchase is "normalized" to zero). This internal inconsistency leads to the possibility that marginal utility can be increasing in the number of products purchased, and hence information products can be complements in their model. We show that if we remove this internal inconsistency, the marginal utility of information products must be diminishing. This implies that information products are always substitutes, regardless of their noisinesses/reliabilities, in a corrected S&P's framework.

Keywords: Bayesian Updating, Information Complements, Information Substitutes, Pricing

JEL Classification: D11, D81, D83, L15, L86, M31

Suggested Citation

Ching, Andrew T. and Horstmann, Ignatius J. and Lim, Hyunwoo, Can Information Products Be Complements? (May 7, 2015). Rotman School of Management Working Paper No. 2602026, Available at SSRN: https://ssrn.com/abstract=2602026 or http://dx.doi.org/10.2139/ssrn.2602026

Andrew T. Ching (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Ignatius J. Horstmann

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/ihorstmann

University of Toronto - Institute for Policy Analysis ( email )

140 St. George Street
Toronto, Ontario M5S 3G6
Canada

Hyunwoo Lim

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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