Costly Information Intermediation as a Natural Monopoly

64 Pages Posted: 19 Dec 2018

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 2018

Abstract

Many markets rely on information intermediation to sustain cooperation between large communities. We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare.

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 2018). Available at SSRN: https://ssrn.com/abstract=3296978 or http://dx.doi.org/10.2139/ssrn.3296978

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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