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Competitive pricing of information: a longitudinal experiment

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Theoretical work on the pricing of information reveals that competition between independent information sellers may result in prices that are negatively related to the quality or reliability of the information (Sarvary and Parker 1997). The theory argues that when information products are reliable (high quality), they are substitutes leading to low prices under competition. Conversely, if information is unreliable (low quality), independent products become complements and competition can increase prices. The goal of this paper is to empirically test these predictions with the help of an experimental market. Information products are independent market forecasts for different product categories - a mature category (low risk) and an emerging category (high risk). These forecasts are used by information buyers in their decision-making. Information sellers set prices competitively and they are rewarded based on their performance (profit). Buyers and sellers are assigned to one of two quality conditions: High-quality or reliable information and Low-quality or unreliable information. The reliability of information products (forecasts) is exogenously given and needs to be inferred by both buyers and sellers from data about past forecasts. The results fully support the theory. After some experimentation, prices converge to levels that are strikingly different in the two quality conditions. Specifically, prices are significantly higher when the information sold is unreliable (low quality). Furthermore - and still consistent with the theory - in both market conditions buyers tend to purchase multiple information products from different sellers. Finally, the risk associated with the information buyers' decision moderates the difference between equilibrium prices across quality conditions.

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