The Information Deficit in Electronic Markets

Electronic markets for information-intensive products are characterized by less than complete information about some product attributes even though these attributes influence the buyer’s purchase decision. We term this as an “Information Deficit” and investigate this phenomenon through an analytical model and through analysis of an extensive collection of data from currently functional online markets. We present an analytical model of an electronic market where sellers can control the extent of product attribute information that they release and explore the conditions under which sellers make product information available to potential customers. We model the seller’s decision to furnish product attribute information as a three stage game and analyze the resulting equilibria and welfare implications from a policy standpoint. We demonstrate that under fairly general conditions, in the presence of even very small cost associated with the dissemination of information, vendors will choose to provide just enough information to distinguish their products from their competitors. We investigate how sellers’ strategies differ when buyers’ indulge in parallel search for product information aided by shopbots as opposed to sequential search for price. We thus demonstrate the existence of an inefficiency in Internet markets that causes considerable uncertainty to the buyers that are located in the “switching threshold” of products. We also furnish data from currently functional electronic markets and analyze a data set consisting of nearly two thousand products in the PC-Game industry and show extensive empirical evidence in support of our model’s predictions.