A surprise in the price of knowledge

Selling information is a business area that is growing explosively. Information is a product that helps decision makers in their deliberations and is paid for by its users. Many firms are in the business of researching and selling such products.

by Markus Christen and Miklos Sarvary
Last Updated: 23 Jul 2013

The management consultancy, market research and financial information sectors have all seen double-digit average annual growth rates over recent decades as they have sought to provide the information that businesses require. The key quality characteristic of information is its reliability or accuracy and a common assumption is that the price of information should be higher for more reliable information.

In this recent working paper, Markus Christen and Miklos Sarvary, Associate Professors of Marketing at INSEAD, present evidence that prices for reliable information can actually be lower than prices for unreliable information and that sellers of less reliable information can benefit from the presence of competing sellers.

Christen and Sarvary used a market experiment built around the Markstrat 3 business simulation to study information prices under different quality and competitive conditions. Students enrolled in an MBA marketing core course at a major international business school needed to buy market information to manage their Markstrat firms. Students enrolled in an elective course on pricing strategies were given the task of pricing and selling this information to the Markstrat firms. Buyers and sellers were assigned to one of two quality conditions, high-quality (reliable) information and low-quality (unreliable) information. The average transaction prices for information were then contrasted between the two quality conditions.

It was found that, over time, prices converged to two strikingly different price levels with prices for unreliable information being significantly higher than those for reliable information. Christen and Sarvary argue that this is because when information products are unreliable, competing products become complements: by buying several products purchasers can combine the different information products to obtain a better estimate of the truth.

Conversely, when information quality is high, buyers only need to purchase a single product to obtain an accurate estimate of the truth and can therefore choose between competing sellers. This leads to price competition and pushes prices down.

Interestingly, the experiment showed that even in the high-quality condition buyers purchased more than one information product. Competition pushed prices so low to make this an economical strategy. This implies that the equilibrium amount of information purchased may not necessarily differ much between markets for low- and high-quality information even though information products are more substitutable in the high-quality condition.

Competition between independent information sellers can result in prices that are negatively related to the quality or reliability of the information. Further experiments revealed that higher prices are encouraged where there are a few competing sellers of low-quality information rather than where there is a monopoly seller or a large number of competing sellers.

The negative relationship between information quality and price revealed here suggests that there is a subtle interaction between buyers' valuations of information and sellers' strategic pricing. Christen and Sarvary conclude that the presence of some competition can be more profitable than facing many competitors or holding a monopoly. These results should give sellers of information pause for thought when deciding the marketing strategy for their products.

INSEAD 2006

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