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Dual Pricing and the Information Deficit in Electronic Markets

We model the availability of product information in Internet-based markets, and explain the underlying causes for the phenomenon of less than perfect information available to consumers of products and services in these markets. We use Salop’s model of product differentiation and explore the conditions under which sellers make horizontal information available to buyers. We demonstrate that under broad conditions, if sellers are unable to charge buyers for product information, in the presence of even very small costs associated with the dissemination of information they will choose to provide just enough information to distinguish their products from their competitors’ and no more than that. Furthermore, we show that a market for product information can partly correct this inefficiency and predict that product information will begin to be traded once an appropriate micro-transaction payment scheme becomes available. It follows from our analysis that allowing sellers to charge an information rent leads to more efficient markets.