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Learning before Trading: On the Inefficiency of Ignoring Free Information

Author

Listed:
  • Doron Ravid
  • Anne-Katrin Roesler
  • Balázs Szentes

Abstract

This paper analyzes a bilateral trade model in which the buyer’s valuation for the object is uncertain and she can privately purchase any signal about her valuation. The seller makes a take-it-or-leave-it offer to the buyer. The cost of a signal is smooth and increasing in informativeness. We characterize the set of equilibria when learning is free and show that they are strongly Pareto ranked. Our main result is that when learning is costly but the cost of information goes to zero, equilibria converge to the worst free-learning equilibrium.

Suggested Citation

  • Doron Ravid & Anne-Katrin Roesler & Balázs Szentes, 2022. "Learning before Trading: On the Inefficiency of Ignoring Free Information," Journal of Political Economy, University of Chicago Press, vol. 130(2), pages 346-387.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/717350
    DOI: 10.1086/717350
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    Cited by:

    1. Daniel Krähmer, 2024. "The Hold-Up Problem with Flexible Unobservable Investments," ECONtribute Discussion Papers Series 278, University of Bonn and University of Cologne, Germany.
    2. Carmona, Guilherme & Laohakunakorn, Krittanai, 2025. "Monopoly pricing with optimal information," Journal of Economic Theory, Elsevier, vol. 228(C).
    3. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    4. Brian C. Albrecht & Mark Whitmeyer, 2023. "Comparison Shopping: Learning Before Buying From Duopolists," Papers 2302.06580, arXiv.org, revised Apr 2023.
    5. Tommaso Denti & Doron Ravid, 2023. "Robust Predictions in Games with Rational Inattention," Papers 2306.09964, arXiv.org.
    6. Peter Achim & Willy Lefez, 2025. "Surplus Squeeze and Informational Hold-Up," Rationality and Competition Discussion Paper Series 538, CRC TRR 190 Rationality and Competition.
    7. Lang, Matthias & Wasser, Cédric, 0. "Benefits and challenges of ambiguous product information," Theoretical Economics, Econometric Society.
    8. Gregorio Curello & Ludvig Sinander, 2024. "The Comparative Statics of Persuasion," CRC TR 224 Discussion Paper Series crctr224_2024_564, University of Bonn and University of Mannheim, Germany.
    9. Mark Whitmeyer, 2026. "Distributional Competition," Papers 2601.22112, arXiv.org, revised Feb 2026.
    10. Yeon-Koo Che & Weijie Zhong, 2021. "Robustly Optimal Mechanisms for Selling Multiple Goods," Papers 2105.02828, arXiv.org, revised Aug 2024.
    11. Mark Whitmeyer & Kun Zhang, 2022. "Costly Evidence and Discretionary Disclosure," Papers 2208.04922, arXiv.org.
    12. Kim, Kyungmin & Koh, Youngwoo, 2022. "Auctions with flexible information acquisition," Games and Economic Behavior, Elsevier, vol. 133(C), pages 256-281.
    13. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    14. Xiaoxiao Hu & Haoran Lei, 2023. "Irrelevance of personalized pricing under strategic market segmentation," Papers 2303.13295, arXiv.org, revised Mar 2025.
    15. Tommaso Denti & Massimo Marinacci & Aldo Rustichini, 2022. "Experimental Cost of Information," American Economic Review, American Economic Association, vol. 112(9), pages 3106-3123, September.
    16. Terstiege, Stefan & Wasser, Cédric, 2023. "Experiments versus distributions of posteriors," Mathematical Social Sciences, Elsevier, vol. 125(C), pages 58-60.
    17. Yang, Kai Hao, 2023. "On the continuity of outcomes in a monopoly market," Journal of Mathematical Economics, Elsevier, vol. 108(C).
    18. Daniel Krähmer, 2024. "The hold-up problem with flexible unobservable investments," CRC TR 224 Discussion Paper Series crctr224_2024_523, University of Bonn and University of Mannheim, Germany.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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