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Learning before trading: on the inefficiency of ignoring free information

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

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 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

  • Ravid, Doron & Roesler, Anne-Katrin & Szentes, Balázs, 2022. "Learning before trading: on the inefficiency of ignoring free information," LSE Research Online Documents on Economics 111892, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:111892
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    File URL: https://researchonline.lse.ac.uk/id/eprint/111892/
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    References listed on IDEAS

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    1. Chatterjee, Kalyan & Vijay Krishna, R., 2011. "A nonsmooth approach to nonexpected utility theory under risk," Mathematical Social Sciences, Elsevier, vol. 62(3), pages 166-175.
    2. Philip J. Reny, 1999. "On the Existence of Pure and Mixed Strategy Nash Equilibria in Discontinuous Games," Econometrica, Econometric Society, vol. 67(5), pages 1029-1056, September.
    3. Matthew Gentzkow & Emir Kamenica, 2016. "A Rothschild-Stiglitz Approach to Bayesian Persuasion," American Economic Review, American Economic Association, vol. 106(5), pages 597-601, May.
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    Citations

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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.

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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