Information gathering externalities for a multi-attribute good1

Most goods and services vary in numerous dimensions. Customers choose to acquire information to assess some characteristics and not others. Their choices affect firms’incentives to invest in quality and so lead to indirect externalities in consumers’choices. We illustrate these ideas by characterizing a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex-ante. Indirect externalities in information gathering arise because consumers do not consider the effects on the firm’s investment incentives when choosing which information to acquire. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers’information gathering and thereby the firm’s investment, can paradoxically reduce consumer surplus, profits, and welfare.