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Economics of Information

Professor Mark Armstrong

My current research is about information in consumer markets. Information is transmitted between consumers and firms by advertising, consumer search, word-of-mouth between consumers, data brokers who sell information about consumers to firms, and by many other channels. Consumers get good or bad deals from sellers depending on (a) how much they know about the offerings of different firms and, conversely, (b) how much firms know about consumer preferences. The internet has been transforming both (a) and (b), allowing consumers to discover and evaluate products with greater ease and enabling firms to personalise prices and target their advertising. I try to formulate theoretical models of information flows, which aim to uncover which kinds of information help consumers and which kinds help firms (or both).

Before the invention of the “price tag” in department stores in the 19th century, the prices that consumers paid for many products were personalised, and depended on haggling skills on both sides and cues picked up by the seller during the selling process about how much the consumer was willing to pay. Thereafter, in most markets in the developed world all consumers paid the same price for a firm’s product. (See Emile Zola’s novel The Ladies’ Paradise for a detailed account of this transition.) The internet has started to bring us back full circle, and a seller’s marketing efforts can be tailored to a consumer’s preferences using data generated (in the main) by the consumer’s online activities rather than his or her physical demeanour. The fact that the price offered to a consumer is often displayed on a computer or phone screen rather than on a price tag means that prices can be personalised with ease. A 2015 report from the U.S. Council of Economic Advisors documented how big data and electronic commerce have reduced the costs of targeting and price discrimination, and that differential pricing “transfers value from consumers to shareholders, which generally leads to an increase in inequality and can therefore be inefficient”. Much commentary in the media shares this—perhaps unduly—pessimistic outlook.

My current grant from the European Research Council investigates how the structure of information in consumer markets affects market performance. Broad themes include: Which kinds of information about consumer preferences help firms exploit their customers (information which consumers may wish to conceal or anonymise), and which kinds of information intensify competition for their custom (which they are happy to reveal)? Conversely, which kinds of information about firms’ products help consumers secure a good deal, and which kinds harm them? Do consumers and firms have congruent interests about the use of some kinds of information? How do firms compete when consumers know about only a limited subset of firms in the market? How do the dual information channels of consumer search and advertising interact? What role should public policy—in areas such as privacy, price discrimination, the costs of consumer search and advertising, and the protection of captive customers—play with regard to the provision of information in consumer markets?