Information Acquisition, Diffusion and Disclosure in Markets

Traditionally in economic theory, consumers have perfect information about the all the features of the products, such as quality and price, firms provide. This information is necessary for consumers to make optimal choices. Without this information markets may not perform well in coordinating demand and supply. In many real-world markets, however, consumers do not possess this information. Instead, they need to spend valuable resources (their time and travel cost) to acquire it. Firms, on their part, may have incentives to disclose some of their private information, where disclosure may take the form of self-advertising, information provided by third party intermediaries or rating agencies. An important question in this regard is whether firms have the right incentives to provide correct information that consumers can trust. If information is non-verifiable, such as in the case of credence goods, firms may not have an incentive to disclose information in the first place as the content may not be trusted by consumers. This research project investigates a variety of settings where acquisition of information by consumers, the disclosure activities of firms and diffusion of information through consumer networks play a crucial role. Acquisition, disclosure and diffusion are clearly related. When few consumers acquire information, little information can be diffused, while if information is disclosed and disseminated efficiently, people may not have the incentive to incur a cost to acquire more information themselves. There is a large economics literature on information acquisition, diffusion and disclosure. The different subprojects that we envisage develops this literature further in the following directions. Three subprojects consider search markets where consumers have to a search cost to acquire information. An important, recent application in this context are search auctions, where firms bid for having their products displayed prominently in online search engines. Information disclosure is important here. We also focus on what consumers may learn about unobserved features while searching. In two subprojects on information disclosure, we ask how firms may manipulate consumer behaviour by strategically disclosing information. The final two subprojects investigate information acquisition and diffusion in social networks. One of these projects relates to how the information flow in the network affects the search decisions of consumers, while the other project focusses on migration decisions. Apart from the common theme running through the different subprojects, there is also a common research methodology, namely game theory. As we focus on information issues, the appropriate research methodology is that part of game theory that deals with incomplete and imperfect information. Where appropriate, we supplement this approach with experiments to test the validity of the theoretical predictions.

Traditionally in economic theory, consumers have perfect information about the all the features of the products, such as quality and price, firms provide. This information is necessary for consumers to make optimal choices. Without this information markets may not perform well in coordinating demand and supply. In many real-world markets, however, consumers do not possess this information. Instead, they need to spend valuable resources (their time and travel cost) to acquire it. Firms, on their part, may have incentives to disclose some of their private information, where disclosure may take the form of self-advertising, information provided by third party intermediaries or rating agencies. An important question in this regard is whether firms have the right incentives to provide correct information that consumers can trust. If information is non-verifiable, such as in the case of credence goods, firms may not have an incentive to disclose information in the first place as the content may not be trusted by consumers. This research project investigates a variety of settings where acquisition of information by consumers, the disclosure activities of firms and diffusion of information through consumer networks play a crucial role. Acquisition, disclosure and diffusion are clearly related. When few consumers acquire information, little information can be diffused, while if information is disclosed and disseminated efficiently, people may not have the incentive to incur a cost to acquire more information themselves.