Publication: Markets for information : of inefficient firewalls and efficient monopolies
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2008-01
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Abstract
In this paper we build a formal model to study market environments where information is
costly to acquire and is of use also to potential competitors. In such situations a market for
information may form, where reports - of unverifiable quality - over the information acquired
are sold. A complete characterization of the equilibria of the game is provided. We find that
information is acquired when its costs are not too high and in that case it is also sold, though
reports are typically noisy. Also, the market for information tends to be a monopoly, and there is
typically inefficiency given by underinvestment in information acquisition. Regulatory
interventions in the form of firewalls, limiting the access to the sale of information to third
parties, uninterested in trading the underlying object, only make the inefficiency worse. On the
other hand, efficiency can be attained with a monopolist selling differentiated information,
provided entry is blocked. The above findings hold when information has a prevalent horizontal
differentiation component. When that is not the case, and the vertical differentiation element is
more important, firewalls can in fact be beneficial.
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Information sale, Cheap talk, Conflicts of interest, Information acquisition, Chinese walls, Market efficiency