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Costly Information Intermediation as a Natural Monopoly

In this paper, we show that information trade has similar characteristics to a natural monopoly, where competition may be detrimental to efficiency due either to the duplication of direct costs or the slowing down of information dissemination. We present a model with two large populations in which consumers are randomly matched to providers on a period-by-period basis. Despite a moral hazard problem, cooperation can be sustained through an institution that gives incentives to information exchange. We consider different information pricing mechanisms (membership vs. buy and sell) and different competitive environments. In equilibrium, both pricing and competitive schemes affect the direct and indirect costs of information transmission, represented by directed fees paid by consumers and the expected loss due to imperfect information, respectively.

Keywords: costly information trade; market structure, natural monopoly.
JEL codes: D47, D83, D85.

Suggested citation: Monte, Daniel, and Roberto Pinheiro, 2017. “Costly Information Intermediation as a Natural Monopoly,” Federal Reserve Bank of Cleveland, Working Paper no. 17-21.

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