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Markets for Information: Of Inefficient Firewalls and Efficient Monopolies

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  • Antonio Cabrales
  • Piero Gottardi

Abstract

In this paper we build a formal model to study market environments where information is costly to acquire and is of use also to potential competitors. In such situations a market for information may form, where reports - of unverifiable quality - over the information acquired are sold. A complete characterization of the equilibria of the game is provided. We find that information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is typically inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to third parties, uninterested in trading the underlying object, only make the inefficiency worse. On the other hand, efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When that is not the case, and the vertical differentiation element is more important, firewalls can in fact be beneficial.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2336.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2336

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Keywords: information acquisition; cheap talk; sale of information;

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  1. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
  2. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
  3. Benabou, R. & Laroque, G., 1992. "Using privileged information to manipulate markets: insiders, gurus, and credibility," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  4. Hamid Mehran & Rene M. Stulz, 2006. "The Economics of Conflicts of Interest in Financial Institutions," NBER Working Papers 12695, National Bureau of Economic Research, Inc.
  5. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
  6. Brad Barber, 2001. "Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns," Journal of Finance, American Finance Association, vol. 56(2), pages 531-563, 04.
  7. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  8. Fishman M. J. & Hagerty K. M., 1995. "The Incentive to Sell Financial Market Information," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 95-115, April.
  9. Bolton, Patrick & Freixas, Xavier & Shapiro, Joel, 2007. "Conflicts of interest, information provision, and competition in the financial services industry," Journal of Financial Economics, Elsevier, vol. 85(2), pages 297-330, August.
  10. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August.
  11. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  12. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
  13. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  14. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, 06.
  15. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-28, July.
  16. repec:bla:restud:v:76:y:2009:i:4:p:1359-1395 is not listed on IDEAS
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Cited by:
  1. Viola Chen, 2008. "Essays in Applied Theory," Levine's Working Paper Archive 122247000000002243, David K. Levine.
  2. Aaron S. Edlin, 1997. "Is the Corner Electronics Store Violationg the Antitrust Laws? (or Why the Good Guys Aren't)," Levine's Working Paper Archive 1009, David K. Levine.
  3. Andrea Galeotti & Sanjeev Goyal, 2007. "The Law of the Few," Economics Discussion Papers 636, University of Essex, Department of Economics.

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