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Competitive pricing of information: a longitudinal experiment (RV of 2004/27/MKT)

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Theoretical work on the pricing of information reveals that competition between independent information sellers can result in prices that are negatively related to the quality or reliability of the information. The theory argues that when information products are unreliable (low quality), independent products become complements and competition can increase prices. The goal of this study is to empirically test the theory's counterintuitive predictions with the help of an experimental market based on a business simulation. Information products are independent market forecasts, which are available from different competing information sellers and used by information buyers to make marketing decisions. Sellers set prices to maximize their profit and buyers decide from which seller or sellers to buy to maximize their own profit (via their marketing decisions). 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 set and must be inferred by both buyers and sellers from historical forecasts about another market. The results from this experimental market fully support the theory. After some experimentation, prices converge to levels that are strikingly different between the two quality conditions: prices are significantly higher when the information sold is unreliable (low quality). Moreover, with few competing sellers of low-quality information, prices are higher than with a single seller or with a large number of competing sellers.

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