Costly Information Intermediation as a Natural Monopoly

46 Pages Posted: 4 Dec 2017

See all articles by Daniel Monte

Daniel Monte

Sao Paulo School of Economics - FGV

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: November 16, 2017

Abstract

In this paper, we show that information trade has similar characteristics to a natural monopoly, where competition may be detrimental to efficiency due either to the duplication of direct costs or the slowing down of information dissemination. We present a model with two large populations in which consumers are randomly matched to providers on a period-by-period basis. Despite a moral hazard problem, cooperation can be sustained through an institution that gives incentives to information exchange. We consider different information pricing mechanisms (membership vs. buy and sell) and different competitive environments. In equilibrium, both pricing and competitive schemes affect the direct and indirect costs of information transmission, represented by directed fees paid by consumers and the expected loss due to imperfect information, respectively.

Keywords: Costly Information trade, Market Structure, Natural Monopoly

JEL Classification: D47, D83, D85

Suggested Citation

Monte, Daniel and Pinheiro, Roberto, Costly Information Intermediation as a Natural Monopoly (November 16, 2017). FRB of Cleveland Working Paper No. 17-21, Available at SSRN: https://ssrn.com/abstract=3081161 or http://dx.doi.org/10.2139/ssrn.3081161

Daniel Monte

Sao Paulo School of Economics - FGV ( email )

Rua Itapeva, 474
12° andar, Bela Vista
Sao Paulo, Sao Paulo 01332-000
Brazil
55 11 3799-3727 (Phone)

Roberto Pinheiro (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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