Pricing Advice: The market for diagnostic information

2003-01-01T00:00:00Z (GMT) by Ashish Arora Andrea Fosfuri
Diagnostic information helps agents to make more accurate decisions. One such decision is about investing in projects with uncertain outcomes. The value of diagnostic information is the difference in expected payoffs with and without it, and we show that such a value is non-monotonic in the ex-ante expected value of the project to be undertaken. We analyze optimal pricing schemes for selling information to buyers with unknown ex ante value. With a monopolist information seller, a striking result is that the optimal menu of contracts is remarkably simple. A pure royalty is offered to buyers whose projects have low ex-ante expected value and a pure fixed fee is offered to buyers whose projects have high ex-ante expected value. This result is robust to the presence of different types of information and to the introduction of competition in the market for diagnostic information.