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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 study, within a formal model, market environments where information is costly to acquire and is of use also to potential competitors. Agents may then sell, or buy, reports over the information acquired and choose the trades in the market on the basis of what they learnt. Reports are unverifiable - cheap talk messages - hence the quality of the information transmitted depends on the conflicts of interest faced by the senders. We find that, in equilibrium, 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 inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to agents uninterested in trading the underlying object, only make the inefficiency worse. 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 the vertical differentiation element is more important firewalls can in fact be beneficial.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2009/11.

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Date of creation: 2009
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Handle: RePEc:eui:euiwps:eco2009/11

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Keywords: Information sale; Cheap talk; Conflicts of interest; Information Acquisition; Firewalls; Market efficiency;

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Cited by:
  1. Andrea Galeotti & Sanjeev Goyal, 2010. "The Law of the Few," American Economic Review, American Economic Association, vol. 100(4), pages 1468-92, September.
  2. Viola Chen, 2008. "Essays in Applied Theory," Levine's Working Paper Archive 122247000000002243, David K. Levine.
  3. 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.

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