Working Paper

Costly Information Intermediation as a Natural Monopoly

Abstract: Many markets rely on information intermediation to sustain cooperation between large communities.We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare.

Keywords: Natural Monopoly; Market Structure; Costly Information trade;

JEL Classification: D47; D83; D85;

https://doi.org/10.26509/frbc-wp-201721r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2017-11-16

Number: 17-21R

Note: This is a revision of Working Paper 17-21 which was issued in November of 2017.