Price Competition and Consumer Externalities in a Vertically Differentiated Duopoly with Information Disparities

In this paper, we extend the model of vertical product differentiation to consider information disparities about quality differences and their effects on price competition. If uninformed consumers overestimate vertical differentiation, asymmetric information is a source of market power and informed consumers exert positive externalities on high quality product purchasers and negative externalities on low quality product purchasers. Such a result is consistent with the fact that information undermines brand. If uninformed consumers are skeptical, adverse selection issues arise and market demands may be perfectly inelastic to prices. With elastic demands equilibrium prices may be either distorted downwards or reflect real quality if the share of informed consumers is suffciently high. Therefore, with skeptical consumers firms may want either to signal quality or subsidize information provision.     

Genetic Information: Comparing Alternative Regulatory Approaches When Prevention Matters

We compare the alternative approaches used for regulating genetic information in the health insurance market when prevention measures are available. In the model, firms offer insurance contracts to consumers who are initially uninformed of their risk type but can obtain such information by performing a costless genetic test. A crucial ingredient of our analysis is that information has decision‐making value since it allows for the optimal choice of a self‐insurance action (secondary prevention). We focus on the welfare properties of market equilibria obtained under the different regulatory schemes and, by using an intuitive graphical analysis, we rank them unambiguously. Our results show that Disclosure Duty weakly dominates the other regulatory schemes and that Strict Prohibition represents the worst regulatory approach.     

Bid–Ask Price Competition with Asymmetric Information between Market-Makers

This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.     

Information acquisition and mutual funds

We study the formation of mutual funds by generalizing the standard competitive noisy rational expectations framework. In our model, informed agents set up mutual funds as a means of selling their private information to uninformed agents. We study the case of imperfect competition among fund managers, where uninformed agents invest simultaneously in multiple mutual funds. The size of the assets under management in the mutual fund industry is determined by endogenizing the agents' information acquisition decisions. Our model yields novel predictions on the informativeness of price, the optimal fees of mutual funds, and the equilibrium risk premium. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium.     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

A note on welfare-improving ignorance about quality

Consider a monopolist that is selling a high quality product when the quality is unknown to a fraction of the consumers. If the quality cannot be signaled and the fraction is sufficiently large, then the monopolist will offer a low price to induce uninformed consumers to buy. If the fraction is sufficiently small, then uninformed consumers are irrelevant to its optimal price. If the uninformed consumers are priced out of the market as a result, then welfare can decrease. I am very grateful for the comments of two anonymous referees that have significantly improved this paper.     

Information aggregation in experimental asset markets in the presence of a manipulator

We study with the help of a laboratory experiment the conditions under which an uninformed manipulator—a robot trader that unconditionally buys several shares of a common value asset in the beginning of a trading period and unwinds this position later on—is able to induce higher asset prices. We find that the average price is significantly higher in the presence of the manipulator if and only if the asset takes the lowest possible value and insiders receive perfect information about the true value of the asset. It is also evidenced that the robot trader makes trading gains. Finally, both uninformed and partially informed traders may suffer from the presence of the robot.     

Asymmetric Information in Simple Bargaining Games: An Experimental Study

Bilateral bargaining situations are often characterized by informational asymmetries concerning the size of what is at stake: in some cases, the proposer is better informed, in others, it is the responder. We analyze the effects of both types of asymmetric information on proposer behavior in two different situations which allow for a variation of responder veto power: the ultimatum and the dictator game. We find that the extent to which proposers demand less in the ultimatum as compared to the dictator game is (marginally) smaller when the proposer is in the superior information position. Further we find informed proposers to exploit their informational advantage by offering an amount that does not reveal the true size of the pie, with proposers in the ultimatum game exhibiting this behavioral pattern to a larger extent than those in the dictator game. Uninformed proposers risk imposed rejection when they ask for more than potentially is at stake, and ask for a risk premium in dictator games. We concentrate on proposers, but also explore responder behavior: We find uninformed responders to enable proposers’ hiding behavior, and we find proposer intentionality not to play an important role for informed responders when they decide whether to accept or reject an offer by an (uninformed) proposer.     

Tariffs,Quotas, and Forward Contracts under Asymmetric Information*

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.     

Information in conflicts

We consider two-player contests for a prize of common but uncertain value. For settings where one player knows the value of the prize, while the other only knows its prior distribution, we give conditions for when the uninformed agent is ex ante strictly more likely to win the prize than is the informed agent. In the special case of a lottery contest, equilibrium expenditures are lower under asymmetric information than if either both agents are informed or neither agent is informed.     

Rationing rule, imperfect information and equilibrium

Summary. The impact of imperfect information on the price setting behaviour of firms is analysed. Specifically, consumers support an information cost to become informed about prices. Firms are endowed with U-shaped average cost curves. If a firm does not supply more than its competitive supply as determined by its marginal cost schedule, then we show that the existence of a pure strategy equilibrium is conditional on the rationing rule employed. If uninformed consumers are served first then the monopoly price is the sole equilibrium whenever consumers' information costs are high enough. Otherwise, a pure strategy equilibrium fails to exist contrary to the results of Salop and Stiglitz (1977) or Braverman (1980) who implicitly suppose that firms supply all the demand at a given price. Received: May 17, 1999; revised version: September 15, 2000     

Asymmetric Information and Adverse Selection in Mauritian Slave Auctions

Information asymmetry is a necessary prerequisite for testing adverse selection. This paper applies this sequence of tests to Mauritian slave auctions. The theory of dynamic auctions with private and common values suggests that when an informed participant is known to be active, uninformed bidders will be more aggressive and the selling price will be higher. We conjecture that observable family links between buyer and seller entailed superior information and find a strong price premium when a related buyer purchased a slave, indicative of information asymmetry. We then test for adverse selection using sale motivation. Our results indicate large discounts on voluntary as compared to involuntary sales. Consistent with adverse selection, the market anticipated that predominantly low-productivity slaves would be brought to the market in voluntary sales.     

The Role of Information Provision as a Policy Instrument to Supplement Environmental Taxes

This paper examines, within a dynamic framework, the role of information provision as a policy instrument to supplement environmental taxation. Several products are responsible for health as well as environmental damages. Many consumers do not possess the required information to optimally substitute away from these products. However, as the stock of information regarding the negative effects of these products builds up, an increasing fraction of consumers behaves optimally. The government uses two policy instruments, environmental taxation and information provision. We show that as the accumulated stock of information increases, the optimal tax rate declines over time. Information provision can shift market demand towards environmentally friendly goods over time, and thus reduce the required level of the tax rate. Our results provide strong evidence in support of information campaigns as a policy instrument to supplement traditional environmental policies.     

When and Where Are Informed Traders? What Is Their Relationship with Analysts in the Price Discovery Process?

The authors' aim was to analyze the influence of analysts' recommendations on the activity of informed and uninformed traders and whether such influence produces changes in the price discovery process. The analysis was carried out in the Spanish market, considered to be an ideal market given its characteristics. The authors' results indicate that although investors as a whole react to new information from analysts and their activity increases, this reaction is not independent of the type of stock. Informed traders do not increase their activity with small stocks to the same extent as uninformed investors do. Furthermore, the influence of these movements on price discovery is not significant. The results suggest that the interpretation role of analysts is more important for less accessible firms in terms of assessing their growth opportunities. This role may enhance the herding behavior of uninformed agents trading in those small titles for which they would otherwise need to invest extra time and extra money for taking profitable decisions.     

The real puzzle of blackmail: An informational approach

The “puzzle” of blackmail is that threats to reveal private information that would be harmful to someone in exchange for money are illegal, but revelation is not. The resolution is that concealment of information about product quality impedes the efficient operation of markets, whereas revelation promotes it. The real puzzle is why possessors are not naturally inclined to sell to uninformed parties, who value the information more than would-be blackmail victims. The answer has to do with the public good qualities of information, which create an appropriability problem in transactions with uninformed parties. The paper also discusses incentives to acquire compromising information.     

Incomplete Markets, Allocative Efficiency, and the Information Revealed by Prices

We compare rational expectations equilibria with different degrees of information revelation through prices. These equilibria arise in a two-period exchange economy with finitely many states and signals, multiple commodities and incomplete financial markets for nominal assets. We show that there are always equilibria where information is redundant in the sense of being of no value to the uninformed traders. We give conditions under which for a generic set of economies, parametrized by endowments and utilities, there exist open sets of equilibria for which allocative and informational efficiency are independent, with implications for monetary policy. Journal of Economic Literature Classification Numbers: D52, D60, D82, E52.     

Sequential Common-Value Auctions with Asymmetrically Informed Bidders

We study an infinitely repeated first-price auction with common values. We focus on one-sided incomplete information, in which one bidder learns the objects' value, which itself does not change over time. Learning by the uninformed bidder occurs only through observation of the bids. The proprietary information is eventually revealed, and the seller extracts essentially the entire rent (for large discount factors). Both players' pay-offs tend to 0 as the discount factor tends to 1. However, the uninformed bidder does relatively better than the informed bidder. We discuss the case of two-sided incomplete information and argue that, under a Markovian refinement, the outcome is pooling as information is revealed only insofar as it does not affect prices.     

Information Provision by Interest Groups

We investigate interest groups’ incentives to inform consumers about the damaging practices of firms and the impact such an IG has on firms’ technology choices. The IG aims to reduce the production of some bad, say pollution. It can at a cost investigate firms’ production practices and inform consumers about its findings. Since consumers care about the environment, revealing differences in pollution levels between firms leads to vertical product differentiation. The information, by shifting sales from ‘dirty’ towards ‘clean’ firms, reduces pollution. We show that the IG is most inclined to investigate firms in relatively competitive industries and that the threat of being unmasked as a polluter prompts dirty firms to adopt a clean technology.     

Information acquisition in the ultimatum game: An experimental study

We experimentally investigate if free information disadvantages a player relative to when information is unavailable. We study an Ultimatum game where the Proposer, before making an offer, can obtain free information about the Responder's minimum acceptable offer. Theoretically, the Proposer should obtain the information and play a best reply to the Responder's minimum acceptable offer. Thus the Responder should get the largest share of the surplus. We find that an increasing number of Proposers become informed over time. Moreover, the proportion of Proposers who use the information to maximize money earnings increases over time. The majority of information-acquiring Proposers, however, refuse to offer more than one-half and play a best reply only to Responders who accept offers of one-half or less. This, together with a substantial proportion of Proposers who choose to remain uninformed, means that the availability of free information backfires for Proposers only by a little. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C70, D63, D80     

Environmental risk and welfare valuation under imperfect information

Consumers are often uninformed, or unsure, about the ambient level of environmental risk. An optimal policy must jointly determine efficient levels of self-protection, information provision, and public risk mitigation efforts. Unfortunately, conventional welfare measures are not amenable to welfare analysis in the presence of imperfect information. We develop a theoretical welfare measure, called quasi-compensating variation, that is a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the “value of information,” but also a means to appropriately evaluate the welfare effects of various policies when consumers are imperfectly informed about ambient risk. This welfare measure allows us to obtain a number of results that the traditional CV measure fails to offer. In particular, we show that the consumer’s willingness to pay for a (small) environmental risk reduction is higher for those who underestimate ambient risk than for those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk.