Consumer Information and Firm Pricing: Negative Externalities from Improved Information

Abstract

We analyze the effect of consumer information on firm pricing in a model where consumers search for prices and matches with products. We consider two types of consumers. Uninformed consumers do not know in advance their match values with firms, whereas informed consumers do. Prices are lower the greater the proportion of uninformed consumers. Hence uninformed consumers exert a positive externality on the others, in contrast to standard results. This leads to socially excessive investment in gathering prior information when aggregate demand is price-sensitive.