An Experimental Study of the Negative Externality from Improved Information in a Differentiated Products Search Model

This experimental study examines whether the content of information and the timing of its dissemination affects firms’ market power. We construct laboratory markets that capture the key features of a price-setting, differentiated goods, duopoly model analyzed by Anderson and Renault (2000). Consumers must typically incur a search cost in order to obtain any information, but a fraction of the consumers receive partial information on price or product characteristics at no cost. The comparative statics of the model provide a ranking of prices based on whether consumers receive information on price or characteristics under different timing assumptions, generating four experimental treatments. Contrary to simple intuition, in this model the presence of informed consumers imparts a negative externality by raising equilibrium prices. The laboratory data support this negative externality prediction when sellers face a large number of automated buyers that are programmed to follow the optimal search strategy. The prices observed in the laboratory conform to the model’s comparative statics and are broadly consistent with the predicted price levels. When a small number of human buyers are used, however, excessive buyer search instigates increased price competition amongst sellers. In treatments where a fraction of the consumers receive additional information, sellers post prices that are significantly lower than the treatment-specific predictions and do not correspond to the predicted ranking. This aggressive price setting behavior was found to be a rational response by the sellers to the buyer search behavior.