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Information Gathering Externalities for a Multi‐Attribute Good
Author(s) -
BarIsaac Heski,
Caruana Guillermo,
Cuñat Vicente
Publication year - 2012
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2012.00475.x
Subject(s) - incentive , investment (military) , externality , business , microeconomics , quality (philosophy) , product (mathematics) , economic surplus , ex ante , welfare , information good , industrial organization , economics , the internet , market economy , philosophy , geometry , mathematics , epistemology , politics , political science , law , macroeconomics , world wide web , computer science
Most goods and services vary in numerous dimensions. C ustomers choose to acquire information to assess some characteristics and not others. Their choices affect firms' incentives to invest in quality and so lead to indirect externalities in consumers' choices. We characterize a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex‐ante . Consumers do not internalize their influence on the firm's investment incentives when choosing which information to acquire. Cheaper information affects consumers' information gathering and thereby firm investment. This can paradoxically reduce consumer surplus, profits, and welfare.