Information Gathering Externalities for a Multi-Attribute Good


  • We thank the Editor and referees for their useful suggestions, and particularly helpful audiences at the 2005 NY Commuters' IO day, Alicante, Chicago GSB, Kellogg School Management, Oxford University, Southampton University, University of Edinburgh, Technion, UCL, Université de Cergy-Pontoise, ESSET 2005 and 2006, IIOC 2006, CETC 2006, 6th Annual Duke/Northwestern/Texas IO Theory Conference, Mark Armstrong, Mariagiovanna Baccara, Matthew Bidwell, Justin Johnson, Michael Katz, Alessandro Lizzeri, Meg Meyer, David Myatt, Volker Nocke, Laura Veldkamp and Lawrence White.


Most goods and services vary in numerous dimensions. Customers 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.