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arXiv · 2202.09985

Monopoly, Product Quality, and Costly Information

Jeffrey Mensch·Doron Ravid·João Thereze
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Abstract

A seller offers a buyer a schedule of transfers and associated product qualities. After observing this schedule, the buyer chooses a flexible costly signal about his type. We show it is without loss to focus on a class of allocations that compensate the buyer for his marginal learning costs. In the optimal menu, all types typically receive lower-than-efficient quality (including ``at the top''). Moreover, profits are non-monotonic in the level of information costs, and the consumer may be better off when such costs are low than when information is free. When learning costs are steep, the optimal menu contains at most two purchasing options.

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Jeffrey Mensch, Doron Ravid, João Thereze. 2022-02-21. Monopoly, Product Quality, and Costly Information. https://arxiv.org/abs/2202.09985

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