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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26049
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| Title: | Information Gathering Externalities in Product Markets |
| Authors: | Bar-Isaac, Heski
Caruana, Guillermo
Cunat, Vicente |
| Issue Date: | May-2007 |
| Series/Report no.: | EC-07-19 |
| 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. |
| URI: | http://hdl.handle.net/2451/26049 |
| Appears in Collections: | Economics Working Papers
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