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Pricing Diagnostic Information

  • Ashish Arora

    ()

    (Carnegie Mellon University, Hamburg Hall 1108, 5000 Forbes Avenue, Pittsburgh, Pennsylvania 15213)

  • Andrea Fosfuri

    ()

    (Universidad Carlos III de Madrid, Madrid 126--28903, Getafe, Madrid, Spain, and Center for Economic Policy Research (CEPR), London, United Kingdom)

Diagnostic information allows an agent to predict the state of nature about the success of an investment project better than the prior. We analyze the optimal pricing scheme for selling diagnostic information to buyers with different, privately known, ex ante success probability. Investment costs and returns of successful projects are assumed to be the same for all buyers. The value of diagnostic information is the difference in expected payoffs with and without it, and we show that the willingness to pay for diagnostic information is nonmonotonic in the ex ante success probability. When the information seller can offer only one quality level, and negative payments are not allowed, we find that the optimal menu of (linear) contracts is remarkably simple. A pure royalty is offered to buyers with low ex ante success probability, and a pure fixed fee is offered to buyers with high ex ante success probability.

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File URL: http://dx.doi.org/10.1287/mnsc.1050.0362
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 51 (2005)
Issue (Month): 7 (July)
Pages: 1092-1100

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Handle: RePEc:inm:ormnsc:v:51:y:2005:i:7:p:1092-1100
Contact details of provider: Postal:
7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

Phone: +1-443-757-3500
Fax: 443-757-3515
Web page: http://www.informs.org/
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  1. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
  2. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
  3. Sanjay Jain & P. K. Kannan, 2002. "Pricing of Information Products on Online Servers: Issues, Models, and Analysis," Management Science, INFORMS, vol. 48(9), pages 1123-1142, September.
  4. Chang, Chun-Hao & Lee, Chi-Wen Jevons, 1994. "Optimal Pricing Strategy in Marketing Research Consulting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 463-78, May.
  5. Jagmohan S. Raju & Abhik Roy, 2000. "Market Information and Firm Performance," Management Science, INFORMS, vol. 46(8), pages 1075-1084, August.
  6. Ganesh Iyer & David Soberman, 2000. "Markets for Product Modification Information," Marketing Science, INFORMS, vol. 19(3), pages 203-225, February.
  7. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
  8. Ronald A. Dye & Sri S. Sridhar, 2003. "Investment Implications of Information Acquisition and Leakage," Management Science, INFORMS, vol. 49(6), pages 767-783, June.
  9. Richard Nelson, 1962. "Introduction to "The Rate and Direction of Inventive Activity: Economic and Social Factors"," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 1-16 National Bureau of Economic Research, Inc.
  10. Miklos Sarvary & Philip M. Parker, 1997. "Marketing Information: A Competitive Analysis," Marketing Science, INFORMS, vol. 16(1), pages 24-38.
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