Selling Information to Competitive Firms
35 Pages Posted: 3 Nov 2015
Date Written: November 2, 2015
A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agent's production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling the experiment to some of the principals.
Keywords: Adverse Selection, Information Acquisition, Experiments, Competitive Markets
JEL Classification: D40, D82, D83, L11
Suggested Citation: Suggested Citation